Irish Life & Permanent plc Annual Report and Financial Statements

Transcription

1 Contents Pages Irish Life & Permanent plc Annual Report and Financial Statements Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements 2009 Contents Overview Financial Performance Highlights 2 The Group at a Glance 3 Chairman s Statement 4 Group Chief Executive s Review 6 Business Review Group Performance Review 8 Divisional Performance Review 20 Risk Management 30 Corporate Responsibility 40 Corporate Governance Board of Directors 42 Directors Report 44 Corporate Governance 50 Directors Report on Remuneration 56 Financial Statements Statement of Directors Responsibilities 64 Independent Auditor s Report 66 Group Financial Statements 68 Notes to the Group Financial Statements 81 Embedded Value Basis Supplementary Information 211

2 Financial Performance Highlights Statutory Basis (EU IFRS) (Loss) / Profit after tax (attributable to equityholders) ( 313m) 49m EPS (Earnings per share) on continuing activities (117 cent) 18 cent Embedded Value ( EV ) Basis Loss after tax (attributable to equityholders) ( 279m) ( 433m) Total EPS 1 (101 cent) (157 cent) Operating profit before impairment of goodwill and tax ( 196m) 341m Operating EPS before impairment of goodwill and tax 1 (66 cent) 111 cent Banking Business New loans issued 1.2bln 7.1bln Lending book 38.6bln 40.1bln Residential mortgage loan book (Ireland) 27.3bln 27.9bln Customer accounts 14.6bln 14.1bln Life and Investment New Business Life new business - APE (Annual premium equivalent) 348m 511m - PVNBP (Present value of future new business premiums) 2,398m 3,152m Life and investment new business - APE 539m 714m - PVNBP 4,306m 5,180m Dividends Final dividend per share Nil Nil Total dividend per share Nil 22.5 cent Capital Ratios Total Tier 1 Capital Ratio Basel II (includes interim capital requirement of 23%) 9.2% 9.2% Life Solvency Cover (times) Including own shares held for the benefit of life assurance policyholders.

3 The Group at a Glance Irish Life & Permanent plc ( ILP or the group ) is a leading provider of personal financial services in the Irish market with strong market positions in life and pensions, fund management and retail banking. The group s activities comprise retail banking under the permanent tsb brand, life assurance and pensions (including bancassurance) under the Irish Life Assurance brand, fund management under the Irish Life Investment Managers brand and General Insurance through its associate company, Allianz. The group was created in 1999 from the merger of Irish Life Assurance, the largest life assurer in Ireland and Irish Permanent, the leading residential mortgage lender. In 2001, the group acquired TSB Bank and merged its business with Irish Permanent. In January 2010, a corporate restructuring programme was completed whereby Irish Life & Permanent Group Holdings plc ( ILPGH ) became the new holding company for ILP. ILP de-listed and ILPGH became the new listed company on both the Irish and London stock exchanges. All shareholdings in ILP were transferred by way of a scheme of arrangement to an equal shareholding in ILPGH. Group Strategy Both the banking and life assurance businesses have developed significantly since the creation of the group in 1999 reflecting the singular focus on the Irish market, strong product offerings and the focus on customer satisfaction. The strong market positions reflect distribution strength with broadly diversified distribution in both banking and life businesses giving the group access to all segments of the market. The group reviews market place developments ensuring it is positioned positively to meet evolving trends, challenges and opportunities. The retail focus of the group s banking activities and the predominantly unit-linked nature of its life and pensions business reduces the risk profile of the group. 99% of the bank s lending is secured, of which 89% consists of residential mortgages. 92% of the life business is unit-linked where the market risk is borne by the policyholder / investor. Banking Business permanent tsb, the group s banking division, provides a full range of retail banking products and services through its nationwide network of branches as well as through intermediaries and directly over the phone and internet. It is a leading provider of residential mortgages and new car finance in addition to current account and retail deposit facilities. Strategically the focus of its banking business is to service the residential owner occupier mortgage and consumer finance credit markets and to offer a wide range of deposit and life assurance products and services into its customer base through its customer acquisition strategy. Life Assurance Irish Life Assurance is the leader in the life and pensions market in Ireland. The business operates a multi-channel distribution strategy for its products and services through its two main divisions, Retail Life and Corporate Life. Of particular importance has been the development of its bancassurance operation which it successfully developed in the permanent tsb network and subsequently extended to a number of other credit institutions with branch networks in Ireland thereby expanding its customer base. Fund Management Irish Life Investment Managers ( ILIM ) is the fund management division of the group. ILIM manages money on behalf of a wide range of institutional and retail, occupational defined benefit and defined contribution pensions, large multinational corporations, charities and domestic companies and is the largest manager of Irish pension assets. ILIM has seen significant growth in funds under management since 1992 reflecting its recognised market product and leadership position. Overview Business Review Corporate Governance Financial Statements 3

4 Chairman s Statement was an exceptionally difficult year for the Irish economy and for our customers whose financial positions are so entwined with that economy. As a result it was a difficult, challenging year for each of our core businesses and for the group as a whole. Regretfully that meant another tough year for our shareholders, customers and staff. The financial performance of the group was dominated by the impact of substantial impairment charges in the bank and the impact of the weaker economy on the life company which meant reduced profits in that division. In total the group reported a loss on both an IFRS and Embedded Value ( EV ) basis of 313 million and 279 million respectively. However, throughout the year important progress was made on adapting the group s key businesses to the new economic circumstances. permanent tsb performed extremely well in the critical retail deposits market and secured an extra 1.8 billion in deposits during the year. Irish Life made progress in tackling what was an emerging problem with persistency (a measure of policy retention) and ILIM continued to dominate the fund management business. All the businesses made progress in reducing their cost bases and resizing for a smaller market. That gives us considerable confidence that the financial performance of the group will be stronger in 2010 than in In the context of the extraordinary challenges in financial markets, the introduction of the Government Guarantee Scheme and the approach being adopted by financial institutions both in Ireland and internationally, the board has proposed that no dividend will be paid for While this is regrettable, it is consistent with the priority to conserve capital in the group in the current economic environment. Board Priorities in a Challenging Market The board s priorities throughout the year were: to set out clear directions for each of the key businesses to ensure that they performed as strongly as possible in the difficult environment which pertained and that they pursued change programmes to ensure that they can perform better in these conditions; to ensure that each of the businesses worked sympathetically with customers in financial difficulty to reach realistic, workable solutions to any problems those customers had; to position the group strongly from a strategic perspective in anticipation of likely consolidation in the financial services industry in Ireland over the coming months; and to implement the findings of the Oliver Wyman report on corporate governance which was undertaken in light of the controversy of February In respect of each of these priorities, important progress was made. Advancing Strategic Agenda The strategic agenda is particularly important for the future of the group. It is clear that we are at a critical juncture for the financial services industry in Ireland. Over the course of the coming months we expect very significant decisions to be taken about the future shape of the industry here. As the largest player in the life and pensions business, the fund management business and the residential mortgage business, we are determined to play an important role in shaping the solutions which emerge. With that in mind, the group undertook a strategic restructuring during 2009 which was completed in early This means that the group has increased flexibility to participate in corporate transactions in the Irish market where we believe they would be in the best interests of our shareholders and other stakeholders. Improving Corporate Governance At last year s AGM I spoke at some length of the controversy which emerged at the start of 2009 surrounding transactions between Irish Life & Permanent plc and Anglo Irish Bank in As we stated clearly at that time, the transactions which took place were wrong and should not have taken place. The board was not advised of the transactions as it should have been and it would not have given permission for them to take place if it had been so advised. Those events led to the swift resignations of three senior executives from the group which was a critical first step in responding to this crisis.

5 Chairman s Statement The board also moved quickly to commission international risk and compliance experts Oliver Wyman to review corporate governance at the group to identify what action was needed to further strengthen our processes and procedures in this area. The board has now fully implemented the proposals made, the key actions included the appointment of a new Group Head of Risk and Compliance, the restructuring of board committees and reporting lines along with the strengthening of risk and control processes throughout the group. Kevin Murphy was appointed as Group Chief Executive in June Kevin is a very experienced executive and has worked with Irish Life, the group s life assurance business, since He was appointed to the board of the group in 1999 and since 2005 has been responsible for the operation of the group s life and pensions businesses. He served as Chief Executive of the group s fund management business between 1993 and Kevin is working closely with the Government, the Regulator and all the other stakeholders alike to manage the challenges in the business and the wider economy. In December 2009 Pat Ryan was appointed to the board. Pat has considerable experience of risk management in financial services combined with professional actuarial qualifications. This means he can bring an unusually relevant insight into the operations of the group which span the life assurance and banking businesses. In March 2010 Bernard Collins was appointed to the board. Bernard has extensive business experience both in Ireland and overseas and will further strengthen our board. Eamonn Heffernan and Liam O Reilly have indicated that they will not be putting themselves forward for re-appointment and thus will retire from the board at the conclusion of the AGM. Both Eamonn and Liam have been valued colleagues and have made important contributions to the board during their tenure. I want to express my appreciation to both of them for their work on the board. National Developments The Government Guarantee Scheme which was extended in December 2009 has been instrumental in retaining the confidence of both retail and corporate customers regarding the security of their deposits with the seven participating financial institutions. This scheme has facilitated the group s funding programme and I wish again to express my appreciation for this continued Government support. Uniquely amongst the institutions covered by the Government Guarantee Scheme, the group is not transferring any assets to the National Asset Management Agency ( NAMA ). We believe this is an important differentiator for the group. We also believe that once the assets begin transferring from the five participating institutions to NAMA, liquidity will increase in the market which will have a positive effect on our group. Outlook Following the completion of our corporate restructuring in January 2010, the group is strategically placed to participate efficiently with any developments in the Irish financial services market during the course of the year. Progress on any corporate developments await the commencement of the NAMA transfer process and the recapitalisation of the participating banks. I believe that 2010 will be a year of challenge and change in the Irish financial services market which the group will actively participate in to secure additional value for all our stakeholders. On the business front, one of our key priorities will be to ensure that all our customers facing difficulties are dealt with sympathetically and that realistic and workable solutions will be found. I believe the investment in change programmes which we pursued in 2009 leave us better placed to compete in this challenging market. We hope in the coming year to make further progress on rebuilding our financial strength and laying the foundation for future success. Finally, on behalf of the board I want to acknowledge the contribution made by the group s management team and that of our hard working staff together with the support of our shareholders in these difficult times. Gillian Bowler Chairman Overview Business Review Corporate Governance Financial Statements 23 March

6 Group Chief Executive s Review 6 Background 2009 was a very difficult year for our customers and our businesses. The defining development during the year was a steep and quick economic correction with GDP falling by close to 8% and unemployment increasing to 12.5% and while the pace of the decline slowed noticeably during the year, it still had a profound effect on our key businesses. In that context, our priority during the year was to support our key businesses as they adapted to this new environment and to drive the changes necessary to allow the group recover in the months and years ahead. In this regard, I believe we have been successful. Group Profitability - IFRS Basis The financial performance of the group is dominated by the cost of provisions made for impaired loans in the lending book of permanent tsb. The group made an operating profit of 68m before provisions for impairment (2008: 245m profit). After provisions for impairment, the group recorded an operating loss of 308m in 2009 (2008: 41m profit). While provisions dominate this result, other factors include lower net interest income due to higher funding costs, lower investment contract fee income due to market movements and negative shareholder property returns. Total group earnings for 2009 fell sharply on a statutory (IFRS) basis with a statutory loss after tax attributable to equityholders of 313m (2008: 49m profit). At the end of the year shareholder funds were 2.0bln (2008: 2.3bln). Group Profitability Embedded Value Basis The pre-tax operating loss for the year on an Embedded Value ( EV ) basis was 196m (2008: 341m profit before the impairment of goodwill). The principal factors in the reduction in EV operating profit were the lower new business contribution and the negative persistency experience in the life business along with the increase in impairment provisions in the banking business and the reduction in net interest income. On an EV basis the loss after tax attributable to equityholders of 279m improved significantly on the 2008 loss of 433m principally resulting from negative short-term investment fluctuations, which, albeit negative, were significantly better than those experienced in Progress in 2009 The overriding focus of the group in 2009 was to drive the changes necessary in the core businesses to allow them compete in this new environment. We made progress in reducing costs in the key businesses and we will continue to drive this agenda in In the life company we took action to address a growing persistency issue in the Retail Life division. This had first emerged as the broader economy weakened in late 2008 and continued through the first half of As a result of our actions we saw the persistency experience improve in the latter half of the year. In the bank, we redirected the sales focus to the retail deposit market which resulted in retail deposit balances growing by 23% on We also moved decisively to increase interest rates on our standard variable rate residential mortgages and some other products in light of the continuing high cost of funds. For 2010, I am looking forward to a significant improvement in the profitability of the life business but I expect 2010 to be another difficult year for the bank. The strategies commenced and completed in 2009 position the group positively to take advantage of the opportunities resulting from the more positive economic outlook for Banking Businesses The principal challenges for the banking business in 2009 were funding, credit quality, cost management and margins. In 2009 the bank successfully re-focused its sales efforts to growing the retail deposit book. We regard this book, coupled with long-term debt, as a stable source of funding for the group. These funds accounted for 48% of the total funding mix in 2009 and are expected to increase to 60% in The increase will be supported by the significant momentum achieved in retail deposit growth in 2009, US $1.75bln long-term debt issued in January 2010 and 2bln long-term debt issued in March The extension of the Government Guarantee Scheme in December 2009 was welcomed by the group and will facilitate the bank s long-term debt agenda over the coming months. We have clearly stated our intention to address our high loan-to-deposit ratio and have made progress on this during the year. At year end that ratio stood at 246% (2008: 271%). Our target for 2010 is to reduce it further to 230% through a combination of deposit book growth and reduced loan balances resulting from the expected lower level of new business volumes in 2010.

7 Group Chief Executive s Review Credit quality and impairments are critical issues for the bank businesses. Arrears in Ireland accelerated in the first half of the year with the significant increase in unemployment, but the rate of increase moderated in the second half of 2009 in line with unemployment levels. The large increase in impairment provisions in 2009 reflects those trends. We expect arrears in our Irish loan book to peak in In our UK business, arrears have fallen since peaking in March. We continue to tightly control costs in the bank which are now 13% lower than the peak. The underlying costs in 2009 were down 10% year on year with headcount down 8%. We have already initiated a number of measures which will see further progress on this agenda including the closure of eleven branches and a reduction in the coming weeks of staff numbers by one hundred and forty full time equivalents. With net interest margins falling in 2009 to 0.83% (2008: 1.05%) permanent tsb re-priced the Irish residential variable rate mortgages in September 2009 and again in February Deposit spreads, which increased in 2009 due to competitive market pressures, are expected to reduce gradually in the market generally in Life Assurance and Fund Management Businesses Irish Life Assurance continues to be the market leader in the life, pensions and investment market in Ireland. Nevertheless, sales declined here in line with the broader market and in light of the weaker economy. Over the year as a whole, APE sales were down 32% year on year at 348m. Retail Life sales performed strongly in the second half of 2009 with the Independent Financial Adviser channel being the most resilient, while Corporate Life sales were impacted by rising unemployment and salary reductions. Sales activity in 2010 will be supported by the repositioning of our product range to reflect the more risk averse needs of our customers. In Corporate Life, the launch of a new lifestyle investment strategy for defined contribution pension schemes will allow the group to actively participate as the market moves from defined benefit to defined contribution pension schemes sales volumes are expected to be flat year on year resulting from the recovery in Retail Life sales being offset by the continuing decline in Corporate Life sales as unemployment and low salary growth continues. The retention agenda progressed successfully in 2009 with a marked improvement in our retention rates in the second half of the year, particularly in Retail Life. Resulting from redundancies in the economy and scheme closures, the growth in Corporate Life s in-force book has slowed. As policies in Corporate Life are not being encashed, the persistency effect on our earnings is less in Corporate Life than in Retail Life. The life businesses had positive mortality and morbidity experience in 2009 resulting in a 23m gain in risk experience variances in our EV earnings. Our fund management business, Irish Life Investment Managers, had a very strong year with inflows of 1.9bln in 2009 and increased its market share to 31.2%. We are now the dominant fund management company in Ireland. Following a significant cost reduction agenda, 2009 saw life assurance underlying costs fall by 10% year on year. This includes a 7% reduction in headcount. This business has now been right-sized for the business flows expected in Capital The bank s capital ratio on a Basel II basis was 9.2% at 31 December 2009 (2008: 9.2%). This compares to a minimum requirement of 8%. The minimum statutory solvency capital requirement of Irish Life Assurance was covered 1.6 times at the year end (2008: 1.6 times). Corporate Activity On 18 January 2010, the group completed a major corporate restructuring whereby Irish Life & Permanent Group Holdings plc ( ILPGH ) became the new holding company for Irish Life & Permanent plc ( ILP ). ILP de-listed and ILPGH became the new listed company on both the Irish and London stock exchanges on this date. All shareholdings in ILP were transferred by way of a scheme of arrangement to an equal shareholding in ILPGH. This was an important exercise in preparing the group to participate in the expected consolidation of the financial services marketplace in Ireland, on which we are likely to see progress this year. Outlook In summary, 2009 was a difficult year. However, we made important progress in addressing key challenges and together with an expected improvement in broader economic conditions in Ireland, we are better positioned for 2010 than for In 2010, I expect the banking businesses results to be broadly similar to 2009 but I anticipate a significant improvement in the life businesses profitability. The foundations built in 2009 should allow the group to face the challenges ahead with confidence. Kevin Murphy Group Chief Executive 23 March Overview Business Review Corporate Governance Financial Statements

8 Group Performance Review The environment in which the group operates remained challenging in 2009 for our customers and our business, with continuing low levels of economic activity and weak consumer confidence. While the worldwide economic upheaval and associated financial crises continued into 2009, the latter half of 2009 saw some signs of improvement both nationally and internationally. Unemployment growth and asset value deflation have impacted the Irish economy significantly and weakened purchasing power along with investor and consumer confidence. These factors lowered new business volumes and margins across all our businesses and resulted in higher impairment provisions on the group s loan portfolios. The group s priority for 2009 was to support the businesses in responding to the changed environment and driving the change needed to allow them to compete successfully. Several initiatives were commenced and completed during 2009 which leaves the group in a better position heading into The group initiated a cost restructuring programme that aligns staffing levels in the life assurance company to current activity projections and the Irish banking business has initiated plans to deliver on the same agenda in The group made progress in addressing the life assurance persistency variance seen in the Retail Life portfolio in the first half of the year. A funding strategy which focuses on maximising stable sources of funding (retail deposits and long-term funding) continues to be pursued in the bank. In response to the increase in the cost of funds, the group increased the cost of variable rate mortgages in September 2009 and again in February 2010 to address the falling net interest margin. Summarised Group Income Statement The group s income statement on an IFRS basis for the years ended 31 December 2009 and 2008 is summarised on a segmental level below: m m Operating (loss) / profit before impairment provisions - Banking Ireland Banking UK Life assurance (15) Fund management Brokerage and third party administration Other 1 (40) (27) Operating profit before impairment provisions Impairment provisions: - Banking Ireland (343) (189) - Banking UK (33) (15) Operating (loss) / profit (308) 41 Share of associate - General Insurance (2) 23 Share of joint venture - Banking Ireland - (1) Taxation (3) (10) (Loss) / profit for the year (313) 53 Group Key Performance Indicators Total tier 1 capital ratio on Basel II basis (%) Life solvency cover (times) Operating profit before impairment provisions on an IFRS basis ( m) Operating (loss) / profit on continuing operations on an IFRS basis ( m) (308) 41 Adjusted operating return on capital employed on an EV basis (%) 2 (7.1) 9.5 Operating (loss) / profit on an EV basis before impairment of goodwill and tax ( m) (196) 341 Shareholder funds per share EV basis ( ) Other includes reconciliations, eliminations and consolidation adjustments as detailed in Note 3 to the Financial Statements. 8 2 The adjusted operating return on capital employed on an EV basis is calculated by dividing the operating profit after tax, excluding share of associate / joint venture (see Note 4 to the EV basis financial statements) by the average shareholder equity for 2008 and 2009 before non-controlling interest and own share adjustment, excluding associate / joint venture and consolidation adjustment (Note 5 to the EV basis financial statements).

9 Group Performance Review The group made an operating profit of 68m before provisions for impairment in 2009 (2008: 245m). The group made an operating loss of 308m in 2009 (2008: 41m profit) after the provisions for impairment. The result for the year is driven by losses in both the banking and life businesses. The banking businesses loss reflects a higher impairment provision charge and lower net interest income arising principally from higher funding costs. The group s life businesses loss results from negative shareholder property returns, lower fund management and investment contract fee income and the reduction of the value of in-force insurance business principally arising from the change in the risk discount rate. IFRS EV m m m m Insurance and investment business Banking (270) 30 (270) 30 Other* (26) 5 (26) 5 (203) 323 (194) 319 Share of associate / joint venture (2) 22 (196) 341 Impairment of goodwill - (170) - (170) EV operating (loss) / profit (196) 171 Short-term investment fluctuations (73) (190) (68) (640) Effect of economic assumption changes (22) 89 (38) 105 Other IFRS consolidation adjustments (10) (11) (17) - Operating (loss) / profit before tax (308) 41 (319) (364) Share of associate / joint venture (2) 22 Following various restructuring programmes in the group, costs fell year on year by 10% excluding restructuring / non-operational costs of 45m. Including restructuring / non-operational costs in 2009, costs fell 4% year on year to 568m. The 2009 result includes a charge of 18m (2008: 86m gain) in respect of the uplift in the value of Irish Life & Permanent shares held for the benefit of policyholders and also includes a gain of 7m (2008: 12m) in respect of the fall in value of owner occupied buildings held for the benefit of policyholders. These movements impact policyholder liabilities but under IFRS the corresponding movement in the asset is not recognised in the income statement. The following table restates the group s IFRS income statement in a format that is comparable to the embedded value income statement shown in the Supplementary Information for the years ended 31 December 2009 and 2008: (Loss) / profit before tax (310) 63 (319) (364) Taxation (3) (10) 40 (65) (Loss) / profit after tax (313) 53 (279) (429) Attributable to: - Owners of the parent (313) 49 (279) (433) - Non-controlling interest (313) 53 (279) (429) Overview Business Review Corporate Governance Financial Statements *Other includes unallocated corporate costs and the income from brokerage and third party administration subsidiaries. 9

10 Group Performance Review Operating Results on Continuing Operations Banking Businesses Operating Results The banking operating loss for 2009 of 270m, compared to a profit of 30m (before impairment of goodwill) in 2008, was principally due to an increase in impairment provisions reflecting the deteriorating macroeconomic conditions in Ireland and to lower net interest income due to higher funding costs. The Republic of Ireland business accounted for 266m of this loss with the UK banking business accounting for 4m of the loss. The net interest margin 3 fell to 83 basis points ( bps ) (2008: 105bps) as a result of the higher funding costs in both the wholesale and retail markets. This resulted in net interest income falling from 473m in 2008 to 375m in An asset re-pricing strategy has seen a 50bps increase applied to Irish standard variable rate mortgages in September 2009 and a further 50bps increase was applied in February Net interest income includes a credit of 7m in relation to deferred acquisition costs; this incorporates a credit arising from the reassessment of expected cash flows from mortgages due to the lower redemption rate experienced in the portfolio in This helped offset the negative impact of mismatches which arose between the fees charged on fixed rate mortgage switches and the cost of closing fixed rate positions in the early part of 2009 (impact on net interest income was circa 30m). A provision was made during 2009 in relation to outstanding settlements on certain closed derivative contracts (impact on net interest income was 15m). The cost of the Government guarantee for the four months ending December 2008 was 8m and this increased to 29m for the twelve months ending December The provision for impairment on loans and receivables was 376m (2008: 82m). This charge consists of a specific provision charge of 213m (2008: 16m) and a collective / incurred but not reported provision ( IBNR ) charge of 163m (2008: 66m). This brings the provision coverage 4, net of write-offs, to 1.2% at the end of 2009 (2008: 0.3%) included a provision for impairment on debt securities of 122m. During 2009, resulting from the continued focus on cost management; the aggregate banking businesses were successful in reducing their costs by 7%. Excluding restructuring / non-operational costs, the cost base fell 10% year on year. The bank has announced a further efficiency programme to be concluded in 2010 with the amalgamation of eleven branches and further reductions in staffing levels. These actions will lead to further cost reductions in Life Assurance and Fund Management Operating Profit The group s life assurance and fund management divisions made an operating profit (before shortterm investment fluctuations ( STIFs ) and economic assumption changes) of 93m for 2009 (2008: 288m). This fall in profits reflects investment contracts and fund management fees falling by 45m year on year due to lower fund balances in 2009 resulting from a fall in markets in The change in shareholder value of in-force (net of short-term investment fluctuations and economic variances) fell by 101m year on year mainly due to lower insurance sales and poor persistency. Also included in the operating profit was the fall in the shareholder expected return of 18m and the increase of 18m in exceptional expenses principally due to the life restructuring costs. Resulting from the economic downturn, 2009 saw an increase in surrenders and withdrawals as investment markets continued to fall and economic conditions worsened. The adverse persistency resulted in a combined negative experience variance and assumption changes of 26m in the 2009 IFRS earnings (2008: 7m positive). With the assistance of a new persistency infrastructure, the Retail Life business has seen persistency improve in the latter half of 2009 while it is expected that Corporate Life will see persistency experience moderate in A restructuring programme in the life assurance and fund management businesses has been successfully completed resulting in a 10% fall in operational costs excluding restructuring / non-operational costs. Life assurance new business written (excluding investment sales for Irish Life Investment Managers, ILIM ), was 348m (2008: 511m) on an APE basis. The decrease was due to the 36% and 30% reduction in Retail Life and Corporate Life sales respectively. In the 2009 statutory profits, new business contribution was 2m negative, compared to a nil contribution in ILIM full year sales of 191m (2008: 203m) were 6% behind the same period last year. 3 Net interest margin is the ratio of net interest income and the average interest earning assets for the year Provision coverage is the ratio of the year end loans and receivables to customers balance (before impairment provision and deferred fees, discounts and fair value adjustments) and the impairment provision balance.

11 Group Performance Review Life Assurance and Fund Management STIFs and Economic Assumption Changes In 2009, STIFs were 73m negative compared to 190m negative in This result includes a loss of 18m (2008: a gain of 86m) in respect of the movement in the year on the value of own shares. These are shares in the company held in policyholder funds entirely for the benefit of policyholders. Under IFRS, the increase in policyholder liabilities as a result of the rise in value of the shares is recognised as a loss but the corresponding rise in value of the asset is not included. The STIFs also include the negative impact resulting from the direct shareholders exposure to property investment (excluding losses on owner occupied properties) of 64m (2008: 55m). Economic assumption changes were 22m negative in 2009 compared to 89m positive in 2008 principally due to the increase in the risk discount rate from 7.0% to 7.5% as a result of the increase in Irish medium-term gilt yields. General Insurance Operating (Loss) / Profit The group s share of the loss in Allianz, (a general insurance business in which the group has a 30% interest) was 2m (2008: 23m profit). A negative underwriting result in 2009 includes negative claims experience in the last quarter resulting from adverse weather conditions at the end of the year. The 2009 performance also includes restructuring costs. Allianz made a dividend payment to the group of 15m in 2009 (2008: 30m). Brokerage and Third Party Administration Operating Profit In 2009, the operating profit on this business segment of 4m (2008: 21m) was impacted by the impairment charge on property and intangibles of 4m (2008: nil) and the lower level of life assurance sales resulting from pay cuts in the public service. Operating Results on an Embedded Value Basis The falls in property markets, increase in unemployment and the continuing dislocation in credit markets significantly impacted the year end valuation of the group s banking and life businesses resulting in the loss after tax, on an Embedded Value ( EV ) basis, of 279m (2008: 429m loss after tax) attributable to equityholders. At operating level, the group s pre-tax loss was 196m for 2009, compared to a profit in 2008 of 341m (before the impairment of goodwill of 170m). Short-term Investment Fluctuations The continued impact of weak property markets on the embedded value of the group s life business has resulted in negative short-term investment fluctuations of 68m in Albeit a negative variance, there was a significant improvement on 2008 s negative fluctuation of 640m. The charge principally resulted from the fall in the value of shareholder property holdings of 97m (2008: 128m negative) and negative movement in the cost of financial options and guarantees of 15m (2008: 62m negative) being offset partially by the positive market effect on unit-linked management fees of 50m (2008: 383m negative). Economic Assumptions The effect of revised economic assumptions was a negative 38m in 2009 (2008: 105m positive). This movement includes the effect of the increase in the risk discount rate from 7.0% to 7.5% as a result of the increase in Irish medium-term gilt yields. Return on capital employed Total embedded value for the group for 2009 fell 10% to 2.5bln (2008: 2.8bln). The adjusted operating return on capital employed on an EV basis for the group (excluding associate / joint venture, non-controlling interest and own share adjustment) was 7.1% negative (2008: 9.5% positive). Overview Business Review Corporate Governance Financial Statements 11

12 Group Performance Review Summarised Group Statement of Financial Position The group s consolidated statement of financial position for the years ended 31 December 2009 and 2008 are summarised below: IFRS Basis EV Basis m m m m Assets Financial assets 32,228 24,761 32,228 24,761 Loans and receivables to customers 38,592 40,075 38,592 40,075 Loans and receivables to banks 4,925 4,775 4,925 4,775 Shareholder value of in-force business ,076 1,080 Other assets 3,546 3,951 3,476 3,831 Total assets 80,021 74,349 80,297 74,522 Liabilities and equity Deposits by banks 18,713 18,546 18,713 18,546 Customer accounts 14,562 14,118 14,562 14,118 Debt securities in issue 13,262 10,899 13,262 10,899 Investment contract liabilities 24,032 21,118 24,060 21,110 Insurance contract liabilities 4,034 4,007 4,034 4,007 Other liabilities 3,412 3,313 3,181 3,066 Equity including non-controlling interest 2,006 2,348 2,485 2,776 Total liabilities and equity 80,021 74,349 80,297 74,522 Loans and Receivables to Customers permanent tsb is focused predominantly on retail lending with 99% of its loan portfolio secured on assets, 89% of which consists of residential mortgages. As a result of adopting a low risk approach to its lending activities, the group is not engaged in business, corporate or property development lending and as a consequence the group is not transferring any loans to the National Asset Management Agency ( NAMA ). The bank continued to focus during 2009 on its core customer lending franchises residential mortgages for owner occupiers and consumer finance in Ireland. Due to the uncertainty with regard to residential property prices, the associated lower transaction volumes and the tightening of credit criteria across all loan products, total loans and receivables to customers of 40.1bln at the end of 2008 fell during the year by 4% to 38.6bln. The loans and receivables to customers balance over principal business lines for the years ended 31 December 2009 and 2008 are summarised as follows: Gross Lending m m ROI residential lending 27,256 27,931 UK residential lending 7,484 7,171 Consumer finance 1,749 2,381 Commercial lending 5 1,939 1,978 Other ,639 39,813 Provision for loan impairment (477) (139) Deferred fees, discounts and fair value adjustments Total lending 38,592 40, Commercial lending excludes loans of 447m (2008: 425m) to the group s life assurance operations including loans held for the benefit of unitlinked policyholders.

13 Group Performance Review Credit Quality A summary of the credit quality of total loans and receivables to customers under the rating system 6 applied by the group is outlined in the following table: Change m m % Neither past due nor impaired Excellent risk profile 23,841 27,458 (13) Satisfactory risk profile 7,885 7,567 4 Fair risk profile 2,877 2, ,603 37,268 (7) Past due but not impaired 3,208 2, Impaired ,036 2, Total loans and receivables to customers 38,639 39,813 (3) Loans classified as past due but not impaired and impaired increased by 59% year on year while loans rated with an excellent risk profile fell by 13%. This reflects the deteriorating trends in economic activity and employment. Further details are available in Note 34 Financial Risk Management. A summary of the loans and receivables impairment provision balances for 2009 and 2008 are outlined below: Specific Collective Total Specific Collective Total m m m m m m As of 1 January Charge to Income Statement Other 7 (9) (29) (38) (5) (13) (18) Following an increase in arrears numbers and falling property values, impairment provisions increased by 338m year on year to 477m, with specific provision increases accounting for 204m of this increase. These provisions represent 58% of the impaired loan balances at the end of 2009 (2008: 69%). This level of provisioning is regarded as appropriate with the majority of the portfolio being secured on assets. The collective / IBNR provision has increased by 134m. The higher charge reflects the fact that collective / IBNR provisions have been provided across all portfolios in acknowledgement of the deterioration of the economy. Future Loan Impairments The group estimates future levels of loan impairments by modelling the bank s loan book against a range of economic assumptions. Increased levels of unemployment, negative GDP growth and falling house prices are the key drivers of impairment and provisioning. Current estimates for the three years ending 2011 indicate an aggregate impairment provision in the range 800m to 900m of which 376m was charged in Overview Business Review Corporate Governance Financial Statements 6 The group uses the 25-point Basel II scale for the internal ratings approach ( IRB ) for credit risk. 7 Other movements comprise amounts written off during the year together with exchange movements. 13

14 Group Performance Review Loans and Receivables to Banks Loans and receivables to banks year on year remained stable at 4.9bln (2008: 4.8bln). At the end of 2009 the balance included 2.5bln (2008: 2.0bln) repayable on demand. Financial Assets The following table provides further analysis on financial assets, on an IFRS basis, for the years ending 31 December 2009 and 2008: Financial Assets m m Debt securities 15,780 10,929 Equity shares in units and unit trusts 13,510 10,390 Derivative assets 1,169 1,162 Investment properties 1,769 2,280 Total 32,228 24,761 Debt Securities The growth in debt securities of 44% to 15.8bln at the end of 2009 includes the 4.5bln increase in securities classified as available for sale. Government bonds account for 66% of the 2009 balance (2008: 59%). The change in value of available for sale ( AFS ) financial assets at 31 December 2009 was 42m positive (2008: 43m negative) which, in accordance with the IAS 39 accounting treatment applied to AFS assets, was taken into other comprehensive income. Included in debt securities is the bank s asset portfolio of 7.4bln. This is principally held in sovereign bonds (48%), highly rated bank Floating Rate Notes (44%) and prime (non-us) euro denominated Residential Mortgage Backed Securities ( RMBS ) (8%). There are no sub-prime assets held within the portfolio. The portfolio is rated 33% AAA, 54% AA, 10% A and 3% BAA/BA/B. rates. This is due to the fact that the non-linked insurance and investment liabilities and the shareholder value of in-force are calculated using assumptions regarding investment returns and interest rates. To the extent that actual returns and interest rates differ from the assumptions used, variances will arise, which may be positive or negative. The group s life business is a relatively low risk operation. Its unit-linked portfolio of 24bln represents 92% (net of reinsurance) of the life assurance and fund management businesses contract liabilities. The unit-linked investment risk is primarily borne by policyholders. In the non-linked insurance and investment portfolio, the group s policy is to match liability flows with high quality assets, principally sovereign bonds. The average duration of the non-linked liabilities is 9.9 years while the average duration of the assets matching these liabilities is 9.8 years. The credit profile of the fixed-rate securities held in the non-linked portfolio is as follows: Credit Profile % % AAA AA 22 9 A The increase in AA rated securities reflects the impact of the downgrading of sovereign bonds held in the portfolio year on year. Given the close duration match of assets and liabilities, any mark to market adjustments in the portfolio due to changes in yield curves are generally matched by equal and opposite movements in the value of the liabilities. 14 The balance of debt securities, 8.4bln, is held at fair value through the profit or loss in the life assurance and fund management businesses. Unit-linked funds account for 6.6bln of this balance while 1.8bln is held in non-linked funds at the end of Equity Shares and Units in Unit Trusts Shares and units in unit trusts are held in listed and unlisted entities and are all designated as fair value through profit or loss. 99% of these balances are held in unit-linked funds on behalf of policyholders. Life Asset Portfolio The value of the group s life operations is exposed to market movements in assets, currencies and interest The life company s shareholder funds of 566m are principally invested in cash and owner occupied property. An analysis of the life shareholder fund investments as at 31 December 2009 is set out in EV supplementary information Note 5. Investment and Insurance Contract Liabilities The increase in investment contract liabilities during the year includes premium receipts of 3.4bln (2008: 4.3bln) and market movements of 2.5bln (2008: 7.7bln negative) being offset partially by 2.9bln (2008: 2.8bln) in claims. Insurance contract liabilities, which are 73% non-linked (net of reinsurance), remained constant year on year at 4bln ( 2.2bln net of reinsurance).

15 Group Performance Review Funding and Liquidity The global economy and financial system continued to experience turbulence and uncertainty during While funding conditions improved over the course of the second half of the year, the terms on which such funding was secured remained onerous and expensive when compared with the terms available historically. This impacted the profitability of the group s banking operations. The regulatory protocol, under which the group operates, requires levels of liquidity based on various cash flow stress tests. The key limits applied are that an institution must have sufficient available liquidity to cover 100% of outflows over the next eight days and 90% of outflows over the coming 9 30 days. As a consequence of the industry-wide wholesale funding difficulties experienced during the first half of 2009, the Financial Regulator agreed to a temporary easing of the liquidity requirements noted above. This easing applied from April to September The standard liquidity requirements applied again since September 2009 and the group operated comfortably within these limits. In early 2009, the group discovered it had inadvertently breached a regulatory reporting requirement and promptly notified and co-operated with the Financial Regulator. The Financial Regulator investigated the matter and entered a settlement agreement with the company. On reaching that agreement, the Financial Regulator acknowledged that Irish Life & Permanent had co-operated fully and had been open and transparent throughout the process and that the company had taken prompt and complete remedial action to fully rectify the breaches. The company was reprimanded for the incident and paid a penalty of 600,000. The matter is now closed. The bank s total funding is well diversified across markets as shown below: Funding Profile % % Customer accounts Long-term debt Short-term debt At 31 December 2009, 60% of the bank s funding comprised customer accounts and long-term debt, down slightly from 62% at the start of the year. At 33%, customer accounts reflected a year on year increase of 23% in retail deposits and a decrease of 12% in corporate deposits. The latter reflected an outflow of overseas deposits in early 2009 which were replaced to a large extent by domestically sourced funds. The success in growing the retail deposit base resulted in a higher cost of funding given the highly competitive nature of the deposit market during the year. The bank is working towards having 70% of funding sourced through retail deposits and long-term funding in the medium term. The loan-to-deposit ratio at the end of 2009 was 246%, an improvement on the 2008 ratio of 271%. The group continues to work to reduce this ratio. Short-term Debt The group has a pool of collateralised assets that are capable of being used as security with a range of counterparties including the European Central Bank ( ECB ). During 2009, an element of assets was used as security for ECB drawings with an average level of drawings for the year of 10.9bln (2008: 7.9bln). The maximum level of drawings during 2009 was 13.5bln (2008: 14.4bln) while drawings at 31 December 2009 were 9.8bln (2008: 11.8bln). ECB drawings, reported in the statement of financial position as deposits by banks, are included in the short-term debt portfolio. Customer Accounts and Deposits In 2009 through a process of leveraging the group s distribution channels in both the bank and life company as well as launching a range of competitively priced products, customer accounts increased to 14.6bln in 2009 from 14.1bln in Retail deposits proved to be a stable and resilient funding source, despite the intense competition in the marketplace. Retail customer account balances increased by 23% ( 1.8bln) year on year to 9.9bln at end Corporate deposit balances at end 2009, including deposits held for the benefit of unit-linked policyholders, were down 12% year on year at 5.8bln, reflecting the outflow of overseas deposits in the early part of 2009 and strong growth in Irish deposits thereafter. Term Funding Notwithstanding the group s focus on deposit growth, the duration of the assets on the balance sheet is such that the appropriate management of duration risk requires that a significant portion of the group s funding should be long term. 15 Overview Business Review Corporate Governance Financial Statements

16 Group Performance Review Funding and Liquidity (continued) The Credit Institutions (Financial Support) Scheme 2008 (the Scheme ) and the Credit Institutions (Eligible Liabilities Guarantee) Scheme (the ELG Scheme ) have been critical in providing Irish financial institutions with access to funding. During the course of 2009, the group successfully secured term funding of 3bln from international investors under the Scheme which expires on 29 September The ELG scheme, which Irish Life and Permanent plc and its subsidiary Irish Permanent (IOM) Limited joined on 4 January 2010, facilitates debt issuance for terms up to five years. These schemes, coupled with improving investor sentiment towards Ireland, enables the group to secure longer term funding, as evidenced by the issuance under the ELG Scheme of a 3-year US $1.75bln bond in January 2010, and a 5-year 2bln in March Further issuance under the ELG Scheme will take place over the course of 2010, which will increase the proportion of long-term funding. The group will also continue to explore alternative term funding opportunities in the senior unsecured and securitisation markets which would contribute to the management of duration risk. Credit Ratings At 31 December 2009 the group was rated BBB+ by Standard & Poor s and A2 by Moody s Investor Service. Capital Management The group has a flexible capital structure with the ability to improve and strengthen its capital base over the next few years. The group s core capital objective is to meet or exceed all relevant regulatory capital requirements and to hold sufficient economic capital to withstand a worst case loss in economic value due to risks arising from business activities. The worst case loss is derived through statistical models influenced by the group s target debt rating. Capital Resources The group s capital resources, on an IFRS basis, as at 31 December 2009 and 2008 are as follows: m m Shareholders equity 2,006 2,347 Non-controlling interest - 1 Undated loan capital Dated loan capital 1,117 1,111 Total capital resources 3,650 4,047 Regulatory Capital The group is regulated by the Irish Financial Services Regulatory Authority ( Financial Regulator ) which sets and monitors regulatory capital requirements in respect of the group s operations. While there are a number of regulated entities within the group which have individual regulatory capital requirements, the two principal regulated entities are Irish Life & Permanent plc, the group s banking operation (trading as permanent tsb), and Irish Life Assurance plc, the group s principal life assurance operation. Regulatory capital is the level below which the group s capital must not fall. The group s policy is to manage the capital base so as to meet all regulatory requirements while maintaining investor, creditor and market confidence and ensuring that there is adequate capital to support future growth in the business. In addition, the relationship between the level and composition of regulatory capital and the shareholders return on capital is monitored to ensure that there is an appropriate balance between equity and debt capital within the overall regulatory capital held. The group manages its capital base through its Internal Capital Adequacy Assessment Process ( ICAAP ). The Irish Life & Permanent ICAAP is designed to allow capital requirements to be risk-weighted and to fully reflect the risk profile and appetite of the group. The ICAAP incorporates a detailed process to identify all material risks for the group and ascertain whether they are to be addressed through management or mitigation (or a combination of the two) and whether capital is required to be held against each risk. The regulatory capital requirement follows existing European capital requirement directives as established under EU legislation. Regulatory capital adequacy is established via comparison of risk-weighted assets and their associated minimum total capital requirements (currently established as 8% of risk-weighted assets), with the regulatory available capital resources of the group. Bank Capital From 1 January 2008, the minimum regulatory capital requirement of the group s banking operations has been calculated in accordance with the provisions of Basel II as implemented by the European Capital Requirements Directive and the Financial Regulator. 16 Resulting principally from the 2009 loss after tax of 313m, total capital resources fell by 397m during the.

17 Group Performance Review The group s capital ratios, after applying the interim capital requirement, remained strong at 31 December 2009 with a Tier 1 and total capital ratio of 9.2% (2008: 9.2%) compared to a regulatory minimum of 8%. The capital base has no Tier 1 hybrid capital in the structure and the Tier 2 capital is only 30% of that permitted under the regulations. The following table sets out the regulatory capital position of Irish Life & Permanent on a Basel II basis at 31 December 2009 and 2008: Available Capital m m Tier 1 capital 3,938 4,174 Tier 2 capital Subordinated liabilities 1,167 1,230 Other ,200 1,311 Tier 1 + Tier 2 5,138 5,485 Life company and other deductions (3,280) (3,426) Total available capital (Tier 1) 1,858 2,059 Required Capital m m Pillar 1 1,313 1,454 Interim capital requirement ( ICR ) at 23% Total required capital 1,615 1,788 Excess own funds Total risk-weighted assets before ICR 16,411 18,173 Total risk-weighted assets after ICR 20,185 22,353 Risk asset ratio (all Core Tier 1) Before the application of the ICR 11.3% 11.3% After the application of the ICR 9.2% 9.2% Basel II The objective of Basel II is to align bank regulatory capital more closely with the economic capital required to support the risks being undertaken. The capital required to cover credit, operational and market risks is required to be explicitly measured under the Basel II methodology. In implementing Basel II, the group has adopted the Internal Ratings Based ( IRB ) approach to credit risk and was awarded IRB accreditation in late Under the IRB approach, the bank uses internally generated risk models to compute the capital required to support credit risk by calculating the probability of default ( PD ) and the loss given default ( LGD ) in all of its various portfolio exposures. The capital requirement for operational risk is calculated according to the standardised approach, in which all of the institution s activities are divided into eight standardised business lines: corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management and retail brokerage; with individual operational risk weightings applicable to each. Value at risk, an industrywide practice, is the methodology which the group has adopted in regard to the measurement of capital required to support market risk. Under Basel II, as outlined in the above table, riskweighted assets ( RWA ) reduced by 10% from 18.2bln in 2008 to 16.4bln in The group s available capital reduced to 1.9bln giving an end 2009 capital ratio of 11.3% (2008: 11.3%). The 11.3% capital ratio compares with a Basel II regulatory minimum of 8%. 17 Overview Business Review Corporate Governance Financial Statements

18 Group Performance Review Bank Capital (continued) The Pillar 2 capital requirement under Basel II has yet to be determined. In the meantime an interim capital requirement ( ICR ) is applied equal to 23% of Pillar 1 RWAs. Adding this ICR reduces the capital ratio to 9.2%, versus the regulatory minimum of 8%. The application of the ICR effectively prevents a release of capital. However, it is the group s expectation that the Pillar 2 capital add-on will be less than the ICR and will give a capital ratio somewhere between the 11.3% and 9.2%, versus the regulatory minimum of 8%. The group continues to review developments and proposals issued by the Basel Committee on Banking Supervision in order to ensure that it remains appropriately capitalised and prepared for any additional requirements adopted by the EU. Life Capital Irish Life Assurance plc ( ILA ) operates to an internal target solvency cover of 1.6 times the minimum required (2008: 1.6 times). The group considers this to be an appropriate level of capital to manage the business having regard for the basis of calculating liabilities and the insurance and operational risks inherent in the underlying products. The solvency cover for Irish Life Assurance plc, the group s main life assurance operation, at 31 December 2009 is 1.6 times (2008: 1.6 times) the minimum requirement of 416m (2008: 410m). This is summarised below: Solvency Cover m m Minimum capital Regulatory capital Net worth Perpetual debt Other assets available Inadmissible assets (108) (104) The table below sets out the movement in life regulatory capital in 2009 and 2008: m m As at 1 January Capital generated from existing business New business strain (74) (88) STIFs and economic variances (106) (228) Bank dividend (13) (15) Other (10) (2) As at 31 December In 2009, the existing book of life assurance business generated cash flows of 194m compared with 377m in Both the new business strain and the net capital generated were helped by the 22m (2008: 125m) new business strain reinsurance arrangement which was put in place at the end of This arrangement reduced the new business strain by 44m (2008: 59m) and impacted by capital generated from existing business 22m negative (2008: 66m positive). In 2009, the negative STIFs and economic variances of 106m (2008: 228m) were largely due to the tangible asset valuation reductions which the group suffered on property assets and debt securities. In line with the group s capital management policy, whereby all surplus capital above targeted minimum levels is remitted to the group, ILA paid a dividend of 13m (2008: 15m) to the bank holding company. Solvency II The calculation of minimum regulatory capital for the life assurance business is currently based on the EU Solvency I Directive. New requirements will be established under the Solvency II Directive which was formally adopted in 2009 and is expected to be implemented in Solvency II will require the calculation of solvency and reserving requirements on a realistic market consistent basis. Given the low risk nature of its life business, on the introduction of Solvency II the group expects to achieve a significant reduction in the reserves required to support its insurance and investment contract liabilities (December 2009: 26bln net of reinsurance) which would result in an increase in the statutory capital surplus. In light of the expected increase in available capital resources, the group believes it is reasonable to seek to access a limited part of this capital increase at this stage. The group is in discussion with the Financial Regulator and an international bank with a view to securing a value of in-force facility of 200m. 18

19 Group Performance Review Reinsurance Treaty In November 2008, the group finalised the terms of a stop-loss reinsurance treaty in relation to new business with Swiss Re, which will reduce the new business strain in ILA over the next three years. As a result of this treaty ILA s capital requirements for 2009 were reduced by 22m (2008: 125m). Dividend In the context of the extraordinary challenges in financial markets, the introduction of the Government Guarantee Scheme and the approach being adopted by financial institutions both in Ireland and internationally, the board have proposed that there will be no dividend for This approach is consistent with the priority to conserve capital in the group in the current economic environment. This compares to a total dividend per share in 2008 of 22.5 cent. Overview Business Review Corporate Governance Financial Statements 19

20 Divisional Performance Review Banking Operating Review Banking Key Performance Indicators Operating (loss) / profit before impairment of goodwill and tax ( m) (270) 30 Banking margin (bps) Impairment provision balance ( m) Lending book ( bln) Total Tier 1 ratio after ICR (%) Retail deposits balance ( m) 9,889 8,047 Customer satisfaction index (%) In 2009 the group s banking businesses faced significant challenges and, for the Irish business in particular, continued to be adversely affected by the deterioration in the Irish economy, lower consumer confidence, transaction volumes and falling property prices. Resulting from the decision to concentrate on protecting the group s key Irish mortgage and consumer franchises together with the general slowdown in the Irish housing market, overall gross new lending in 2009 fell 84% to 1.2bln from 7.1bln in Total loans and receivables fell by 4% in 2009 to 38.6bln compared to 40.1bln at 31 December Notwithstanding the deterioration in the Irish economy, the bank s customer acquisition strategy continued to be successful in 2009 with the bank using its sales strengths to re-focus its efforts in growing retail deposits. Retail deposit balances increased 23% on 2008 to 9.9bln at the end of During the year, the bank continued to focus on its customer service ethos through its Customer Central programme. In 2009, permanent tsb s customer satisfaction index score reduced slightly from 82.7% to 82.5% Net interest margin 8 ( NIM ) for the year declined to 83 basis points (bps) from 105bps for the full year This resulted in net interest income falling 21% to 375m for 2009 from 473m for This fall principally reflects the higher funding costs associated with the sharp rise in the marginal cost of attracting retail and corporate deposits as well as the cost of refinancing maturing wholesale debt. This pressure was partially offset by the higher asset margins on the Irish mortgage business facilitated by the re-pricing of standard variable rate mortgage products during the year. Net interest income includes a credit of 7m in relation to deferred acquisition costs; this incorporates a credit arising from the reassessment of expected cash flows from mortgages due to the lower redemption rate experienced in the portfolio in This helped offset the negative impact of mismatches which arose between the fees charged on fixed-rate mortgage switches and the cost of closing fixed-rate positions in the early part of 2009 (impact on net interest income was circa 30m). The fall in the net interest margin to 83bps is detailed in the following table: bps Funding costs (18) Liability margins (17) Asset margins 21 Other (8) Portfolio Growth As a result of the unprecedented liquidity conditions in the financial markets, coupled with the economic decline in the bank s core markets, the bank continued to adopt a cautious approach to new lending and balance sheet growth in 2009 and focused on the bank s core customer lending franchises - residential mortgages for owner occupiers and consumer finance - in Ireland. All other lending was suspended. The change in the balances over principal business lines was as follows: Gross Lending m m ROI residential lending 9 27,256 27,931 UK residential lending 6.6bln (2008: 6.8bln) 9 7,484 7,171 Consumer finance 1,749 2,381 Commercial lending 10 2,386 2,403 38,875 39,886 Money market funds Deferred fees, discounts and fair value adjustments ,516 40,639 Inter-group loans and receivables (447) (425) Impairment provisions (477) (139) Total lending 38,592 40,075 8 Net interest margin is the ratio of net interest income and the average interest earning assets for the year Including securitised mortgages. 10 Commercial lending includes loans of 447m (2008: 425m) to the group s life assurance operations including loans held for the benefit of unitlinked policyholders.

21 Divisional Performance Review The contraction of the Irish housing market, which commenced in 2007, continued to accelerate in Demand for new residential mortgages reduced as consumer confidence fell as a result of a combination of economic uncertainty, house price falls (per the permanent tsb / ESRI House Price Index house prices fell on average 18.5% in 2009, having fallen by 9.1% in 2008), and less availability of credit. New Irish mortgages issued by the group of 0.8bln in 2009 showed a reduction of 81% on the 4.2bln issued in As a result, Irish residential mortgage balances outstanding fell by 2% to 27.3bln compared to 27.9bln at year-end A lower level of early redemption activity reflecting market conditions generally was also experienced in The UK residential mortgage book, which was closed to new business in 2008, fell by 3% year on year to 6.6bln. Banking Operating Review - Ireland As a result of exchange rate movements, this book in euro terms, increased to 7.5bln at the end of New consumer finance loans fell 72% to 0.3bln from 1.1bln in 2008 mainly reflecting reduced demand in the new car finance market. The portfolio fell 27% to 1.7bln (2008: 2.4bln) reflecting the short term nature of this portfolio. With new commercial lending being discontinued in 2008, the portfolio fell by 1% to 2.4bln. Regulatory Capital The total Tier 1 regulatory capital ratio (after the ICR) for 2009 was 9.2% (2008: 9.2%). The ratio remains higher than the regulatory minimum of 8%. The pre-tax operating performance of the group s Irish banking business for the years ended 31 December 2009 and 2008 are set out below: m m Net interest income Other non-interest income Other income Trading income (4) 5 Government guarantee charge (29) (8) Investment return Administrative expenses / depreciation / amortisation (276) (289) Impairment of property, equipment and intangible assets (2) - Operating profit before impairment provisions Impairment provisions (343) (189) (266) 18 Impairment of goodwill - (170) Operating loss before tax (266) (152) Against the background of a sharp contraction in economic activity, higher funding costs and a weak Irish housing market, the group s Irish banking business delivered a pre-tax loss of 266m, down from a profit of 18m before impairment of goodwill in The 2009 loss was principally due to the impairment provision charge of 343m up from 189m in 2008 and lower net interest income. Net interest income Net interest income in 2009 at 336m was down 21% when compared to the 2008 outturn of 428m. This was due to the higher funding costs associated with both deposits and wholesale funding in In response to the higher funding costs, the pricing of the standard variable-rate mortgage product was increased in September 2009 by 50bps and a further 50bps in February Overview Business Review Corporate Governance Financial Statements 21

22 Divisional Performance Review Banking Operating Review - Ireland (continued) Net interest income accruing from the mortgage book includes a credit of 7m in relation to deferred acquisition costs; this incorporates a credit arising from the reassessment of expected cash flows from mortgages due to the lower redemption rate experienced in the portfolio in This helped offset the negative impact (circa 30m) of mismatches which arose between the fees charged on fixed charged on fixed rate mortgage switches and the case of closing fixed rate positions in the early part of Other Income Other income of 44m is up 5% compared to 42m achieved in This reflects higher resource fee income and general insurance commission offset by lower bureau de change. Other income excludes the contribution from bancassurance sales generated through the bank, which are reported in the pre-tax profit of the group s life assurance business. Sales of life and pension products through the bank were 29m in 2009 compared to 55m in 2008 with the reduction reflecting a lower level of lump sum investment and protection sales on foot of weaker investment markets generally and the reduced level of mortgage lending. Government Guarantee Charge The Government guarantee charge for 2009 was 29m compared to 8m in 2008 which covered the period from 30 September 2008 to year-end. This cost is calculated as a percentage of the liabilities which are covered by the scheme and is payable on a quarterly basis. Investment return The 2009 investment return of 8m resulted from the purchase of Auburn and Fastnet securities (securities issued by the group) in the market. In 2008, a gain of 29m was achieved on the disposal of the bank s Held to Maturity debt securities portfolio in the first quarter of Costs Administrative expenses including depreciation and amortisation for 2009 were 276m, a 4% fall on the 2008 outturn of 289m. Excluding 2009 restructuring / non-operational costs of 13m, costs in 2009 fell by 9% year on year. Cost management continues to receive significant management attention in 2010 and by the end of 2010 the bank plans to reduce its branch network by 11 branches and reduce headcount by a further 140 full time equivalents. Portfolio analysis The continued deterioration in the general economic environment and the low levels of activity in the residential property market has impacted credit quality. As the decline in property prices in Ireland (18.5% for 2009 per the permanent tsb / ESRI House Price Index) continued in 2009, the loan to values ( LTVs ) of the group s lending portfolio, indexed against industry market values reported by the above mentioned house price index, have risen accordingly resulting in an increase in the number of cases in negative equity. The average indexed LTV of the Irish mortgage portfolio, for residential mortgages and residential investment property ( RIP ) loans now stands at 63% with cases over 100% representing 22% of the portfolio. The deterioration in the Irish economy and in particular, the acceleration of unemployment has resulted in the number of Irish residential mortgage accounts in arrears increasing by 79% year on year to 6.1% of the portfolio. The number of residential mortgage accounts in arrears greater than 90 days has increased from 3,711 in 2008 to 7,228 in 2009, 3.9% of the residential mortgage portfolio. Notwithstanding the level of arrears, 93% of all loan accounts are up to date at the end of 2009 (95% at the end of 2008). Arrears management and customer affordability continues to benefit from the historically low interest rate environment. The key priority for the group in these challenging economic conditions is to minimise the losses arising from credit impairments. Resourcing has significantly increased in the credit and collections areas across all portfolios with particular focus being placed on those arrears arising in more exposed parts of the loan portfolio. There were 7,835 residential mortgage accounts on a moratorium at the end of 2009 representing 4.3% of this portfolio. During 2009, permanent tsb welcomed the introduction, on a statutory basis by the Financial Regulator, of a code of conduct for mortgage arrears. This code ensures that both borrowers and lenders engage with each other pro-actively to address any mortgage repayment difficulties. 22

23 Divisional Performance Review Portfolio quality Loans are treated as impaired as soon as there is objective evidence that an impairment loss has been incurred. Objective evidence includes, but is not limited to, known cash flow difficulties experienced by the borrower, overdue contractual payments of either principal or interest, or a breach of loan covenants or conditions. Impaired loans ( ILs ) at 31 December 2009 and 2008 are set out below: Balances ILs/Total Balances ILs/Total Loans Loans m % m % Residential lending Consumer finance Commercial Lending Specific Provision Coverage 28% 22% Non-performing loans ( NPLs ) are defined as loan balances in excess of 90 days in arrears plus impaired loans. NPLs at 31 December 2009 and 2008 are set out below: Balances NPLs/Total Balances NPLs/Total Loans Loans m % m % Residential Lending 1, Consumer finance Commercial Lending , ROI Residential Lending As a result of the deterioration in economic conditions, arrears continued to increase across the residential portfolio in Case numbers, over 30 days in arrears, increased by 79% to almost 11,400 cases in 2009 from 6,350 cases in The value of total arrears at 31 December 2009 as a percentage of the book was 0.28% compared to 0.16% at 31 December This is reflected in the increase in NPL balances from 605m to 1,342m. Consumer Finance In the consumer finance portfolio, impaired loans as a percentage of the portfolio increased to 9.5% at yearend 2009 from 2.6% at year-end NPLs increased to 11.8% in 2009 from 3.7% in Car finance represents the majority of the consumer finance portfolio. In this portfolio, year on year arrears cases have increased by 41%. The portfolio has seen a moderation in the growth in arrears cases over 30 days in the latter half of the year. The charge for impairment provisions on this portfolio is expected to have peaked in Commercial Lending Commercial mortgage case numbers, over 30 days in arrears, increased by 61% to 554 cases at 31 December 2009 (2008: 345 cases). The value of those arrears at the end of 2009 as a percentage of the commercial mortgage portfolio was 0.9% compared to 0.6% at the end of Impaired loans increased from 0.7% in 2008 to 7.2% in NPLs increased to 12.9% in 2009 from 6.1% in In general prime commercial exposures have continued to perform but where cases do default they are difficult to cure in the short to medium term given the need to acquire tenants with good repayment capacity. Impairment provisions The movement on impaired loans and the arrears performance outlined above resulted in the impairment provision charge for Irish loans and receivables increasing year on year to 343m. A summary of the impairment charge for 2009 and 2008 is as follows: Impairment Charge m m Residential lending Consumer finance Commercial lending The impairment provision charge for Irish loans and receivables for the year increased by 276m to 343m (2008: 67m). The 2009 charge is split between specific provisions of 186m and collective / IBNR provisions of 157m. This reflects the decision to make collective / IBNR provisions of 47m and 30m on the Irish residential mortgage and commercial mortgage portfolios respectively in acknowledgement of the deterioration of the Irish economy in Overview Business Review Corporate Governance Financial Statements 11 Calculation includes intra-group loans of 447m (2008: 425m). 23

24 Divisional Performance Review Banking Operating Review - Ireland (continued) Impairment provisions on the consumer finance portfolio are calculated on a collective and a specific basis. Falling values of second hand cars, albeit they have shown signs of stabilising in the latter half of the year, have resulted in higher losses on repossession and disposal and this, coupled with the 174% increase in the absolute levels of impaired loans, has resulted in a significant increase in the impairment charge on this portfolio to 90m in 2009 (2008: 31m). The 2009 charge includes a 10m specific provision. Customer Acquisition Customer account balances for the Irish banking business at 31 December 2009 totalled 14.6bln, up 3% from 14.1bln at the end of Excluding current accounts, Irish retail deposit balances, principally demand and term deposits, increased by 34% from 5.7bln in 2008 to 7.7bln in This increase more than offset the 4% fall in current account balances to 2.2bln in New customer service initiatives and competitive pricing were launched to attract and retain new deposit balances. In total retail deposits increased 23% to 9.9bln at the end of Banking Operating Review - UK The group s principal business in the UK, Capital Home Loans Limited ( CHL ) is a centralised mortgage lender which is focused on the professional landlord residential investment property market or buy-to-let ( BTL ) as it is referred to in the UK. 94% of the portfolio is BTL (93% in 2008). Capital Home Loans Limited was closed to new business in March 2008, which resulted in the UK lending portfolio falling by 3% to 6.6bln. The focus in CHL is now on customer service and arrears management. The pre-tax results of the group s UK banking business for years ended December 2009 and 2008 are set out below: The operating loss for 2009 of 4m is impacted by an impairment provision charge of 33m which was up from 15m in The 2009 impairment charge of 33m includes a specific charge of 27m and a collective / IBNR of 6m. The higher funding costs experienced by the group in general with have resulted in net interest income falling year on year by 13% to 39m. With new lending suspended in Capital Home Loans since 2008, administrative expenses in the UK fell 39% to 11m facilitated by a fall in average staff numbers from 197 in 2008 to 124 in Portfolio Quality With house prices in the UK increasing year on year by 1.1% (per the Halifax House Price Index), the average index linked LTV of the UK mortgage portfolio is 83% with cases in negative equity representing 24% of the total portfolio at year end. Impaired loans ( ILs ) and non performing loans 12 at 31 December 2009 and 2008 are set out below: Balances % of Total Balances % of Total Loans Loans m % m % Impaired loans Non-performing loans CHL s three month arrears peaked at over 1,600 cases in March 2009 and have declined steadily since to 1,162 cases at year end, a 28% reduction. This downward trend has continued into 2010 in line with that reported by other buy-to-let lenders in the UK although CHL s experience has been consistently better than the industry overall. CHL s three month buy-to-let arrears cases at the end of December 2009 was 2.55% of its loan book compared to the industry average of 3.37% as reported by the UK Council of Mortgage Lenders m m Net interest income Other non-interest income Other income Administrative expenses / depreciation / amortisation (11) (18) Operating profit before impairments Impairment provisions (33) (15) Operating (loss) / profit before tax (4) Non-performing loans are defined as loan balances in excess of 90 days in arrears plus impaired loans.

25 Divisional Performance Review Life Assurance and Fund Management Operating Review IFRS operating (loss) / profit m (2) 187 New business (APE) m New business (PVNBP) m 4,306 5,180 New business margin (APE) % EV operating profit m was a difficult year in the life market in Ireland with weak global investment markets and deteriorating domestic conditions having a significant dampening effect on demand for lump sum investment products in particular. Against this backdrop, the group retained its focus on maintaining Irish Life s leading market franchise and in particular, developing its two most resilient products pensions and protection. Life Assurance Operating Review Life Assurance Key Performance Indicators Life margin (%) Life new business APE ( m) Life market share (%) The sales in the group s principal life assurance businesses are summarised below: Life sales (on an APE basis), fell by 32% to 348m from 511m in 2008 compared to an estimated 28% fall in the overall life market. Fund management sales (on an APE basis) of 191m, while down 6% year on year, facilitated the fund management company, Irish Life Investment Managers, to increase its market share to 31.2% (2008: 29.8%). The pensions market remains a strategic priority for the group and whilst pension sales fell by 32% in 2009, pensions still accounted for 76% of total group life sales in Irish Life Assurance. The strong pensions business in both Retail and Corporate Life enabled the group to maintain its dominant market share position in the pensions market with an estimated market share of 30%. APE 13 Basis PVNBP 14 Basis Change Change m m % m m % Retail Life (36) 1,096 1,450 (24) Corporate Life (30) 1,050 1,398 (25) Irish Life International Limited (17) (17) Retail Life The group s Retail business concentrates on sales of life and pensions products to the retail market in Ireland. It is a market leader with a comprehensive product range spanning pensions, protection, investment and regular savings. Retail Life follows a multi-channel distribution strategy with independent brokers, bancassurance (via permanent tsb), direct sales, franchises, institutional (other bank branches) and telephone / internet channels providing the business with unrivalled distribution reach and customer access points. This distribution reach ensures that Retail is not overly dependent on any one channel (32) 2,398 3,152 (24) The market for retail investment products in 2009 was very weak reflecting the impact of weak global investment markets on investor confidence in equities and property and an investor preference for deposit products offering attractive interest rates. In the face of this reduced demand, Retail Life sales fell 36% to 159m (2008: 247m) on an APE basis. This reduction principally reflects a 29% decline in investment business and a 69% decline in savings business. On a PVNBP basis, total Retail Life sales declined 24% to 1.1bln (2008: 1.5bln). Reflecting reduced sales activity, the cost base was scaled back by a further 12% (excluding restructuring / non operational costs) in 2009 through headcount and payroll reduction initiatives. Overview Business Review Corporate Governance Financial Statements 13 APE sales are calculated as annual value of regular premiums plus 10% of the value of single premiums. 14 PVNBP sales are calculated as total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts. 25

26 Divisional Performance Review Retail Life (continued) Notwithstanding the decline in sales, Retail has an estimated 30% share of the market. It also continued to develop excellence in customer service through its Intouch customer satisfaction programme. In 2009 it launched a broker satisfaction survey which resulted in an index score of 76%. In 2009, Irish Life Retail was awarded the Best in the World at Plain English award beating over 12,000 organisations in over 80 countries. Corporate Life The Corporate Life division sells pension and risk schemes to employers and affinity groups in Ireland distributed principally through pension consultants and brokers (including Cornmarket, a specialist affinity broker and a wholly owned subsidiary of the group). The key drivers of sales growth are employment and salary growth in the Irish economy. The decline in Corporate Life sales in 2009 resulted principally from increasing unemployment, salary freezes and the public sector pension levy. APE sales fell 30% to 164m in On a PVNBP basis sales fell 25% to 1,050m from 1,398m in Corporate Life has a leading position in this market with an estimated market share in excess of 40%. Customer service levels are a key differentiator of providers in the market and the Corporate Life division has achieved competitive advantage through continued and sustained investment in both staff and technology in order to achieve significant improvement in service levels and customer satisfaction. In 2009, Corporate Life achieved a customer service index score of 92.6%, up from 89.1% in This focus on service level improvements and customer satisfaction will continue to be a feature of the division s agenda into the future. Corporate Life persistency experience has deteriorated during 2009 due principally to increasing unemployment, company closures and lower salary levels. Despite this experience, generally policies are not being encashed and, as a result, the persistency effect on Corporate Life s earnings is less than on the Retail Life side. Life Assurance Financial Review - IFRS Basis The operating results of the group s life assurance business under IFRS, for the 12 months ended 31 December 2009 and 2008 are set out below: m m Net interest payable (36) (51) Net fees and commissions (136) (137) Premiums on insurance contracts net of reinsurance Investment return 2,616 (7,693) Fees from investment contracts and fund management Change in shareholder value of in-force business (57) 70 Operating income 3,183 (7,130) Claims on insurance contracts net of reinsurance (329) (314) Change in insurance / investment contract liabilities (2,614) 7,890 Administrative expenses / depreciation / amortisation (183) (190) Impairment (5) - Investment expenses (67) (86) Operating expenses (3,198) 7,300 Operating (loss) / profit before tax (15) 170 The operating loss before tax for 2009 was 15m compared to the operating profit in 2008 of 170m. 26 Operating income Operating income at 3,183m was significantly higher than 2008 ( 7,130m negative) principally due to the large increase in the investment return, which was a negative 7,693m in 2008 compared to a positive of 2,616m in This increase principally reflects the impact of positive investment market returns on policyholder funds in 2009 compared to negative returns in 2008.

27 Divisional Performance Review Life new business written (excluding ILIM investment sales) on an APE basis declined by 32% to 348m (2008: 511m). The new business contribution was 2m negative in the reported 2009 statutory profits, compared to a contribution of nil in Under IFRS, the fixed cost of acquiring investment contract new business is recognised in the year of acquisition whilst profit flows are recognised over the life of the contract. The fees from investment contracts fell by 15% mainly due to the poor persistency experience in 2009 and 2008 coupled with the lower level of average investment fund balances in the twelve months to December 2009 compared to the twelve months to December The reduction of the value of in-force insurance business principally arises from the change in the risk discount rate. Operating expenses Operating expenses of 3,198m in 2009 compare to 7,300m positive in 2008 principally due to the change in insurance and investment contract liabilities. These were 7,890m positive in 2008 compared to 2,614m negative in 2009, again due to the positive investment return on policyholder funds in 2009 and negative returns in The 2009 operating expenses also includes losses of 18m (2008: 86m gain) due to an increase in policyholder liabilities. This increase occurred because Irish Life & Permanent shares, held for the benefit of policyholders, rose in value. There was a corresponding rise in value of the asset represented by the shareholding but under IFRS, a rise in the value of own shares is not recognised in the income statement. The change in insurance contract liabilities shows a net increase in liabilities of 130m compared to a net reduction of 234m in This is mainly due to an increase in insurance linked liabilities arising from positive market returns in 2009 compared to negative market returns in The change in investment contract liabilities has decreased from 7,656m positive in 2008 to 2,484m negative in 2009 mainly due to the investment market gains experienced in The change in these liabilities is reflected in the positive investment return of 2,616m included in operating income in 2009 compared to a negative return of 7,693m in Administrative expenses decreased 4% to 183m in 2009 (2008: 190m). Excluding restructuring / non-operational costs, overall costs were down 10% on 2008 reflecting tight cost management and the successful restructuring necessary due to the slower sales environment. Fund Management Operating Review Irish Life Investment Managers (ILIM) provides investment management services for the group s life and pensions business in addition to managing large segregated funds. ILIM offers a wide range of active, consensus and multi-manager funds with a key focus of the business being on product innovation. The business has grown strongly in the past number of years and now ranks as the largest fund manager in Ireland as measured by domestic funds under management. Fund Management Key Performance Indicators Funds under Management ( bln) Fund Management new business APE ( m) Margin (APE) % Fund Management new business PVNBP ( bln) Margin (PVNBP) % Market share (%) ILIM is committed to market leadership through recognising the needs of its clients and developing and providing the most appropriate investment solutions to meet those needs. ILIM delivered a strong performance in 2009 on both the active and passive sides of the business despite the economic climate and continued to grow its client base. Its market share of domestic funds under management increased from 29.8% in 2008 to 31.2% in Gross new fund inflows were 1.9bln (2008: 2bln). This included new sales of 0.4bln and contributions from existing clients of 1.5bln. The quantum of new client money was adversely affected by the general economic activity in the market. Outflows for the year of 2.2bln were 65% higher than 2008 reflecting the loss of 2 large state clients. Despite market conditions, total funds under management for ILIM were 29.8bln (2008: 26.6bln) representing an increase of 12% year on year. 27 Overview Business Review Corporate Governance Financial Statements

28 Divisional Performance Review Fund Management Financial Review - IFRS Basis The operating results of the group s fund management business under IFRS, for years ended 31 December 2009 and 2008 are set out below: m m Fees from investment contracts and fund management Operating income Administrative expenses / depreciation / amortisation (25) (29) Operating expenses (25) (29) Operating profit before tax Operating profit before tax of 13m is 24% behind 2008 due to a drop in fee income of 8m year on year due to a fall in markets in 2009 being offset somewhat by a 4m reduction in administration expenses. Life Assurance and Fund Management Financial Review - Embedded Value Basis The operating results of the group s life assurance and fund management businesses, presented on an EV basis, for the years ended 31 December 2009 and 2008 are set out below: m m New business contribution Contribution from in-force business Expected return In-force Net worth Experience variances (70) - Assumption changes (1) Operating profit before tax Operating profit before tax for 2009 was down 64% to 102m (2008: 284m). The key drivers of this outturn were a lower level of new business contribution, which was down 49% to 51m (2008: 100m), and the negative experience variances, mainly reflecting negative persistency variances due to higher product withdrawals in Retail Life. New business contribution and margins The decrease in new business contribution is explained by a 25% fall in life and investment sales and the fall in new business margin. Life Margins APE Basis PVNBP Basis % % % % Life Fund Management (ILIM) The reduction in Life new business margins principally reflects the operational gearing impact of a lower level of new business sales as unit fixed costs increased. To enhance margins in the future, a level of restructuring was completed in the second half of When calculated on the PVNBP basis, new business margins, including ILIM, were 1.2% compared to 1.9% in the full year The internal rate of return for 2009 was 9.3% (2008: 12.1%). The average undiscounted payback period 15 for 2009 across the group s life product portfolio, excluding ILIM, was 8.3 years (2008: 7 years). In-force Business Total in-force earnings for 2009 were 51m compared to 184m in This 72% decline in earnings principally reflects the impact of negative persistency variances. Within this, the total expected return fell by 19% to 108m, which principally reflects a smaller book unwinding at a lower risk discount rate than in The expected in-force return represents the unwind of the risk discount rate on the opening shareholder value of in-force. The expected return on the net worth relates to earnings on shareholder assets. It is calculated by reference to the assumed long-term rate of return on property and equities and the actual return on shortterm cash. In 2009, the expected return was 14m compared to 32m in The principal reason for this fall was due to the fall in deposit rates Payback period is calculated as the number of years it takes adding up the cash flows to break even.

29 Divisional Performance Review Experience variances and assumption changes are analysed as follows: Experience Assumption Total Experience Assumption Total changes changes m m m m m m Persistency (66) (42) (108) (29) (31) (60) Risk Expenses / Other (27) Total (70) (1) (71) The aggregate negative persistency experience variance The negative expense / other experience variance of and assumption changes of 108m includes 69m 27m reflects the impact in 2009 of the restructuring in Retail Life where negative persistency has been costs across the life assurance business. The expense experienced across all the main product lines and assumption changes of 32m positive reflects the 38m in Corporate Life. This negative variance was capitalisation of the cost saving achieved by the due to factors arising from the economic environment restructuring and productivity gains in as customers faced lower living standards due to falling incomes and unemployment as well as a move to cash Costs products due to a fall in investor confidence. The Retail Costs within the life assurance and fund management Life persistency experience did improve in the second divisions continue to be tightly managed. Overall half of 2009 relative to the first half of the year with the costs were down 5% at 208m (2008: 218m). When negative persistency experience variance improving restructuring / non-operational costs are excluded costs from a 28m negative variance for the first six months year on year fell by 10%. This reflects the successful to a 14m negative variance for the second six restructuring of the businesses given the lower level of months. The persistency assumption changes of 42m sales activity forecast relative to previous years. negative include a provision for the adverse persistency experience in 2009 continuing in 2010 but at a lower level. The positive risk experience variance results principally from positive mortality and permanent health insurance termination experiences in Retail Life and Corporate Life respectively. Overview Business Review Corporate Governance Financial Statements 29

30 Risk Management 30 Risk Factors The group is subject to risk factors that could have a material adverse effect on the business, financial condition, results of operations and prospects or its ability to continue as a going concern. In addition to the matters set out under the Forward-Looking Statements on the inside cover, the principal factors that may affect the group are described below: The group s results may be adversely affected by general economic conditions and other business conditions The group s results are affected by general economic and other business conditions in Ireland, where the majority of the group s earnings are generated, as well as by conditions in the UK where its subsidiary Capital Home Loans operates. These conditions include changing economic cycles that affect demand for life assurance and banking products and as a result, the group s profitability. Such cycles are influenced by global political events as well as by market specific events, such as shifts in consumer confidence and consumer spending, the rate of unemployment, industrial output and political uncertainty. The global financial system has experienced difficulties since 2007 resulting in very significant deterioration in financial markets. Banks and other lenders have suffered significant losses due to the increased risk of default and the impact of declining asset values on the value of collateral while insurance companies have seen significant falls in sales and asset values. In that same period, the group has experienced reductions in business activity, increased funding costs and funding pressures, decreased asset values, decreased sales, additional write-downs and / or impairment charges with consequent adverse effects on its results of operations and financial condition. Since the end of the first quarter of 2009 there have been some signs of stabilisation in financial markets with reduced volatility versus the peak, modestly improving asset prices in general, although Irish house prices have continued to fall, and modestly tightening credit spreads. However, conditions remain unpredictable. The precise nature of all the risks and uncertainties the group faces as a result of the current global financial crisis and global economic outlook cannot be predicted and many of these risks are outside the group s control. Market conditions may restrict or limit the availability of funding or liquidity to the group The Group s banking business As a result of the continued dislocation of financial markets and in line with the international banking industry generally, the group has seen the availability of funding in certain wholesale markets which it has traditionally accessed been severely disrupted with, in certain markets, no funding being available for periods of time. Since the latter half of 2007, the global economy and the global financial system have been experiencing an ongoing period of significant turbulence and uncertainty. Credit markets worldwide have experienced a severe reduction in the level of liquidity and quantum of term-funding available in the wholesale markets. While recently there has been easing in the availability of funding, the terms on which such funding is available remain more onerous and expensive than the terms available historically. As a result of these events the group has focused on its core customer lending franchises in Ireland. In the event of severe curtailment of credit markets, the group could be placed in a position where it has to significantly curtail growth in the balance sheet with a consequent negative impact on profitability. However, the low risk nature of the group s loan book and the ability to collateralise these assets has provided some flexibility in meeting the group s funding requirements. The Government Guarantee Scheme and the Eligible Liabilities Guarantee Scheme are of significant importance to the group s banking business in supporting availability of funding. Eurosystem funding, and in particular funding from the ECB, is an important lower cost source of funding which the group can access. The group s ability to maintain material levels of funding under the Eurosystem is dependent on the continued eligibility of its collateral. Accordingly, any impact on the group s eligible collateral could restrict the group s ability to continue to access Eurosystem funding. This would further limit its access to funding and liquidity and could further materially affect the group s results, financial conditions and prospects. The Group s life assurance business For certain property linked funds of the group s life assurance business there is the ability for the group to defer encashments for up to six months to allow it time to sell relevant properties. However, if any such properties cannot be sold within this time period the group may have to provide liquidity for these funds which could adversely affect the group s results, financial condition and prospects.

31 Risk Management The level of credit risk faced by the group is impacted by the economic environment Deterioration in economic conditions will continue to increase the credit risks faced by the group by way of increased impairment losses on bank lending. The current slowdown in the Irish and UK economies has resulted in a contraction in both the Irish and UK housing markets. In addition, higher unemployment and increased costs of funding may reduce borrowers ability to repay loans. These and other economic factors may cause prices of property or other assets to fall further, thereby reducing the value of collateral on many of the group s loans and increasing write-downs and impairment losses. The group expects impairments to increase further through the cycle. Specifically relating to the group s life and investment business reinsurance is entered into so that likely statistical fluctuations in insurance risk claims are within acceptable levels from a capital and profit perspective. The group would incur a credit loss if a reinsurer was unable to meet contractual claims. Collateral is employed in some cases in order to limit this risk. A replacement reinsurer would be engaged in such an event. Investment market returns and changes in equity / property values may impact the group s results The performance of the investment markets (equities, property and gilts) has a direct impact on the group s financial results. The group is exposed to direct equity / property holdings within the group s life assurance shareholder assets and from the indirect impact of changes in the value of equities / properties held in policyholder funds from which the group s life assurance operations derive management fees. In addition, volatility of equity and property values and investment performance can affect investor confidence, which in turn can impact both sales and retention. Since 2008, the group has experienced a deterioration in persistency as customers moved to cash products due to the fall in investor confidence. Whilst the group seeks to mitigate this risk through diversification of the portfolio and by offering products which will meet customer needs in these more turbulent market conditions, current market conditions are impacting on customers risk appetite particularly for equity and property products. Life assurance risk and other inherent risks affecting its life assurance business including persistency and market performance risks may impact the group s results Life assurance risk is the volatility in the amount and timing of claims caused by unexpected changes in any of mortality, longevity or morbidity risks: Mortality risk is the risk of deviations in timing and amounts of cash flows (premiums and benefits) due to the incidence or non-incidence of death. Longevity risk is the risk of such deviations due to increasing life expectancy trends among policy holders and pensioners, resulting in payout ratios higher than those that the group originally accounted for. Morbidity risk is the risk of deviations in timing and amount of cash flows (such as claims) due to the incidence or non-incidence of disability and sickness. The group is a major participant in the Irish life and pensions market and as such is exposed to changes in policyholder mortality, longevity and morbidity experience. Changes in mortality, longevity or morbidity rates of policyholders could, therefore, significantly affect the group s results. In its pricing and reserving policies, the group assumes that current rates of mortality for annuitants continuously improve over time. Persistency risk is the risk resulting from the redemption, surrender or lapse of life assurance policies. Since 2008, the group has experienced a deterioration in persistency as customers move to cash in their policies or to stop payment of additional premium due to the fall generally in investor confidence and the reduction in personal net cash flows. A material variation from the group s actuarial assumptions in relation to life assurance or persistency risks could materially and adversely affect the Group s financial condition and prospects. In addition, within the group s life assurance business, the risk discount rate used to calculate the embedded value of the business, which is the principal performance measure used by the group in respect of its life assurance activities, will fluctuate in line with market interest rates and this can have a material impact on the reported results of this business which in turn may adversely affect the group s results, financial condition and prospects. 31 Overview Business Review Corporate Governance Financial Statements

32 Risk Management 32 Downgrades in the group s credit ratings could significantly impact its competitive position and affect its relationships with creditors or trading counterparties The group s credit ratings are an important factor in its continuing financial performance. In particular, the interest rates the group pays on its borrowings and its ability to secure funding are affected by its debt credit ratings, which are in place to measure the group s ability to pay its contractual obligations. The group s long-term senior debt is rated A2 (negative outlook) by Moody s and BBB+ (stable outlook) by Standard & Poor s. The group s short-term debt is rated P-1 by Moody s and A-2 by Standard & Poor s. Long-term and short-term debt issued by the group and covered by the Government Guarantee Scheme or by the Eligible Liabilities Guarantee Scheme carries the sovereign rating and is rated Aa1/P-1 by Moody s and AA/A-1 by Standard & Poor s. Changes in interest rates may impact the group s results Fluctuations in interest rates can also influence the group s banking and insurance and investment performance. The results of the group s banking operations are affected by the management of interest rate sensitivity. Interest rate sensitivity refers to the relationship between changes in market interest rates and changes in net interest income. The composition of the group s assets and liabilities, and any gap position resulting from this composition can cause the reported banking income to vary with changes in interest rates. A mismatch of interest-earning assets and interest-bearing liabilities in any given period may, in the event of changes in interest rates, have an effect on results from the group s banking business. The group s ability to vary the interest rates on customer borrowings to reflect the increased cost of funding may be somewhat restricted particularly where its customers have tracker mortgages. By their nature, these mortgages do not allow the group the flexibility to vary the rate where it would otherwise be desirable or appropriate for the group to do so. Accordingly, restrictions on the group s ability to vary rates, and increased funding costs, may adversely affect the group s results. Within the group s life assurance business the risk discount rate used to calculate the embedded value of the business, the principal performance measure used by the group in respect of its life assurance activities will fluctuate in line with market interest rates and this can have a material impact on the reported results of this business. Excluding this, there is no significant exposure to interest rates within the group s life operations due to the asset / liability matching strategies which it follows. The group conducts its businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations in the markets in which it operates Changes in government policy, legislation or regulatory interpretation applying to the financial services industry in the markets in which the group operates may adversely affect the group s product range, distribution channels, capital requirements and, consequently, reported results and financing requirements. These changes include possible changes in statutory pension arrangements and policies, the regulation of selling practices and solvency requirements. The group may be exposed to potential regulatory action arising from certain transactions between the group and Anglo Irish Bank which were made public in February Adverse experience in the operational risks inherent in the group s business could have a negative impact on the results of its operations Operational risks are present in all of the group s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. The group s business is dependent on processing a large number of complex transactions across numerous and diverse products and is subject to a number of different legal and regulatory regimes. In addition, the group manages a small number of outsourced operations which include certain UK processing and IT functions. In turn, the group is reliant upon the operational processing performance of its outsourcing partners. The group s system of internal control is designed to provide reasonable, but not absolute, assurance against the risk of material errors, fraud or losses occurring. It is possible that internal controls can be circumvented or overridden.

33 Risk Management Any weakness in the systems could have a negative impact on the results of the group. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Systemic risk could adversely affect the group s business Recently the credit environment has been adversely affected by significant instances of fraud and default. Concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions because the commercial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships between institutions. This risk is sometimes referred to as systemic risk and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the group interacts on a daily basis and therefore could adversely affect the group. The impact of pension fund risk Pension fund risk is the risk associated with the uncertainty surrounding required contributions to the group s defined benefit pension schemes. The risk arises because the value of the asset portfolios and returns from them may be less than expected or because changes in interest rates or other financial parameters may give rise to increases in the estimated value of the schemes liabilities. Furthermore increases in longevity may increase the value of the schemes liabilities. Professional consulting actuaries are regularly appointed by the pension fund trustees to assess and review the funding status and the underlying risk profile of each of the group pension schemes. The results of such reviews are used to drive strategic decision making to reduce risk. In addition, stress testing is performed by pension actuaries to assess the Asset / Liability Mismatch ( ALM ) impact of various stress scenarios including adverse market and macroeconomic conditions. The asset mix within each scheme is monitored closely and rebalanced on an annual basis to ensure that the scheme s investment strategy is adhered to. Following a full review of each pension scheme in 2006 and wide consultation with staff and pension fund members, the group s defined benefit pension schemes were closed to new members and the asset mix of the funds was altered in order to reduce ALM risk. Furthermore, it was communicated to existing members that pension benefits were not guaranteed. It was specifically pointed out that if the combination of contributions and investment returns are not sufficient to provide for the specified benefits, then either more money would need to be added, by way of increased contributions from either or both pension scheme members and the group, or else the benefits promised will have to be reduced. Damage to the group s public reputation or brands may adversely affect the group s relationship with new and existing customers Reputation risk is the risk to earnings and capital from damage to the group s public reputation or brands. This may negatively affect the group s relationships with new and existing customers. The group considers reputation risk to be a consequence of risk events captured within other risk categories across the group. Thus, the management of reputation risk is facilitated through the risk management structures put in place for other risk categories and explained above. Litigation and regulatory investigations may not have a material financial impact but could result in reputational damage The group, like all other banks and insurance companies, is subject to litigation in the normal course of its business. The group has no reason to believe that any such litigation will have a material effect on its profit or loss and financial condition. 33 Overview Business Review Corporate Governance Financial Statements

34 Risk Management Group Risk Management Framework In the context of group risk management, risk is defined as unexpected future events leading to variability in performance and damage to earnings capacity, capital positioning, business reputation or cash flows; or any unexpected future event damaging the group s ability to achieve its strategic, financial, or overall business objectives. Risk taking is fundamental to a financial institution s business profile and hence prudent risk management, limitation and mitigation forms an integral part of the group s governance structure. The group operates a proactive Enterprise Risk Management ( ERM ) approach in the identification, assessment and management of risk. This framework underpins profitable and prudent risk taking throughout the group. The group ERM is designed to ensure that all material risks are identified and managed and that business strategy across the group is implemented in full recognition of these risks. Certain transactions between the group and Anglo Irish Bank were made public in February 2009, and following this the board commissioned international risk management and strategy consultants Oliver Wyman to review the group s Corporate Governance framework and to advise on any changes necessary to ensure the group was operating in line with emerging international best practice. The board accepted the recommendations made by Oliver Wyman in this regard, and the following measures were taken in line with that report: The group separated the reporting lines of Internal Audit and Risk Management from Finance. The group upgraded the risk management function of the group and appointed a new Group Head of Risk and Compliance, who sits on the executive management team to input a risk perspective into all key decisions by the group. The group reviewed and strengthened the risk and control throughout the organisation. Under relevant headings, the recommendations from Oliver Wyman are as follows: Ensure the board s visibility of risk and control issues, at all times: - Improve management communication and reporting to the board; - Enhance board oversight of risk and control issues; Reorganise executive level management: - Increase the influence of senior risk and control staff; Strengthen the risk and controls culture at all levels of the organisation; Upgrade the Risk Management function - Extend and clarify the function s responsibilities; - Redesign the organisational structure and reporting lines, increasing the function s influence within the organisation and ensuring independence from the business; - Invest in human capital and infrastructure; Integrate risk and control considerations firmly into key business processes - Such as strategy setting, planning and budgeting, performance management and compensation setting. In addition, the board established a new board committee, the Board Risk and Compliance Committee, to provide oversight and advice to the board on risk governance, and to support the board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the group s strategy is consistent with the group s risk appetite. The group has taken steps to improve management communication and reporting to the board and improve board oversight of risk and control issues. 34

35 Risk Management Risk Appetite and Strategy Risk Governance The board sets overall policy in relation to the type and level of risk that the group is permitted to assume. To achieve this, the board has established a formal risk appetite statement. The risk parameters identified in the risk appetite statement are applied in practice throughout the business. These risk parameters are closely aligned with the group s strategic and business objectives. Risk parameters established in the risk appetite statement address core group values such as solvency stability, earnings stability, prudent liquidity management, prudent credit risk management and operational risk management. Risk parameters have been established based on relevant internal and external data. The group risk appetite statement has been developed through an iterative process involving all the key functions of the group. The board holds the final responsibility for approval of the risk appetite statement. The board is ultimately responsible for the governance of risk throughout the group and establishing mechanisms and structures to control and manage risk. In addition, the board approves overall policy in relation to the types and level of risk that the group is permitted to assume in the implementation of strategic and business plans. The group s risk governance framework was established by: Reviewing the risks applicable to the group and selecting the methodology and reporting structures best placed to identify, capture and monitor these risks. Developing relevant risk policies with appropriate terms of reference, mandates and committee composition. Benchmarking the group s structures against industry guidelines for risk governance. Overview Business Review Corporate Governance Financial Statements 35

36 Risk Management The risk governance structure, which is subject to ongoing review and amendment by the Board of Directors, is set out below: Board of Directors Group Internal Audit Board Audit Committee Board Risk and Compliance Committee Group Credit Committee Life Assurance Assets and Liabilities Committee Banking Assets and Liabilities Committee Group Operational Risk Committee Group Counterparty Credit and Market Risk Committee Group Compliance Committee 36 The risk governance structure facilitates reporting and escalation of risk issues from the bottom up, and communication and guidance of group risk policy and risk decisions from the top down. Board Risk and Compliance Committee The Board Risk and Compliance Committee has responsibility for oversight and advice to the board on risk governance, the current risk exposures of the group and future risk strategy, including strategy for capital and liquidity management, the setting of compliance policies and principles and the embedding and maintenance throughout the group of a supportive culture in relation to the management of risk and compliance. The Board Risk and Compliance Committee supports the board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the group s strategy is consistent with the group s risk appetite. The Board Risk and Compliance Committee is responsible for monitoring adherence to the group risk appetite statement. Where exposures exceed levels established in the appetite statement, the Board Risk and Compliance Committee is responsible for developing appropriate responses. This is facilitated by the periodic review of a key risk indicators report calibrated to the risk appetite statement. The Board Risk and Compliance Committee, in turn, delegates responsibility for the monitoring and management of specific risks to committees accountable to it. These committees are the Group Credit Committee, the Banking Assets and Liabilities Committee, the Life Assurance Assets and Liabilities Committee, the Group Operational Risk Committee, the Group Counterparty Credit and Market Risk Committee and the Group Compliance Committee. The terms of reference for each committee, whose members include members of group senior management, are reviewed regularly by the Board Risk and Compliance Committee. Group Internal Audit Reporting to the Audit Committee, Group Internal Audit independently monitors compliance with the group s policies and procedures as well as evaluating the effectiveness of internal control structures across the group. The objectives of Group Internal Audit are: To provide increased business control assurance by reviewing the full spectrum of business risks; To deliver timely and graded audit reports to business management, which assist in the management and monitoring of risk; To assist in developing improved business operating processes; To disseminate best practice in relation to operational efficiency and effectiveness throughout the group;

37 Risk Management To adopt a partnership approach with business management delivering an audit plan that aligns itself with the achievement of corporate objectives; and To monitor the group s compliance with laws; regulation, internal policies and directives and any codes of practice adopted by the group. The work of Internal Audit follows a risk based approach which is documented in an annual audit plan. This is approved each year by the Audit Committee. The Group Head of Internal Audit reports on an operational level to the Group Chief Executive, has direct access to the Audit Committee and reports regularly to the Audit Committee. The Audit Committee monitors and reviews the effectiveness of Group Internal Audit activities on an ongoing basis. Group Internal Audit has access to all records, files, documents and personnel within the group, as required to carry out its assignments. Group Credit Committee The Group Credit Committee is chaired by the Group Finance Director and includes members of group senior management. It is responsible for developing and implementing credit policy within the group. The policy addresses all material aspects of credit risk management, including credit risk assessment processes, collateral requirements and the risk grading of individual credit exposures. The credit risk management systems operate through a hierarchy of lending authorities which are related to internal loan ratings, which are in turn linked to the probability of credit default. All credit approvals are subject to a system of tiered individual authorities. Above a certain level approvals require sign off by the Group Credit Committee. The Group Credit Committee also monitors credit and credit risk exposure and its evolution against the risk appetite set by the board, oversees the development, implementation and performance of credit risk measurement tools. The committee oversees the application of the Internal Rating Based ( IRB ) regulatory capital regime across portfolios, reviews the results of forecasting and stress testing, and monitors regulatory and economic capital consumption against limits set within the risk appetite framework. Assets and Liabilities Committees ( ALCOs ) The group has separate ALCOs for its banking and life and assurance businesses. The Banking ALCO is chaired by the Group Finance Director and includes members of group senior management. The Banking ALCO reviews and is responsible for all activities relating to Treasury counterparty credit exposures, funding and liquidity management and strategy and structural asset and liability management. The Banking ALCO is also responsible for the management of market risk. The Life Assurance ALCO is chaired by the Group Chief Executive and includes members of group senior management. The Life Assurance ALCO is responsible for the management of risks arising from the life assurance business assets and liabilities. Group Operational Risk Committee The Group Operational Risk Committee is chaired by the Group Head of Risk and Compliance and includes core business unit heads from across the group. The Group Operational Risk Committee provides oversight and management of operational risk within the group. This oversight includes reputation impacting events and risks. The committee identifies the group s top operational risks and ensures appropriate actions are taken by the business to mitigate and manage these risks. Group Counterparty Credit and Market Risk Committee The Group Counterparty Credit and Market Risk Committee is chaired by the Group Head of Risk and Compliance and includes management representatives of Treasury and Irish Life Investment Managers. The Group Counterparty Credit and Market Risk Committee is responsible for cascading risk appetite limits to business unit level, setting exposure limits for financial counterparties, and monitoring aggregated counterparty credit risk exposures against limits. The Group Counterparty Credit and Market Risk Committee proposes changes to credit risk limits, policy, guidelines and methodology to the Board Risk and Compliance Committee and recommends appropriate strategies. Group Compliance Committee The Group Compliance Committee is chaired by the Group Head of Risk and Compliance and includes core business unit heads from across the group. The Group Compliance Committee provides oversight and management of compliance within the group, including setting out the compliance and ethical standards to be 37 Overview Business Review Corporate Governance Financial Statements

38 Risk Management Group Compliance Committee (continued) observed by staff across the group in relation to legal, regulatory and market conduct responsibilities. The emphasis is on conducting business following a best practice approach and with a strong customer focus. Group Actuarial Function Led by the group s Chief Actuary, this function is responsible for monitoring and regulating the capital and solvency of the life assurance companies and reports to the boards of life assurance companies, Life Assurance ALCO and the Board Risk and Compliance Committee on a regular basis. Summary risk reports are prepared for the consideration of the Life Assurance ALCO on a regular basis. Reports, which include asset / liability matching reports, are prepared covering shareholder exposure to market risk. Reports are also prepared reviewing credit risk in relation to significant reinsurance counterparties. Group Head of Risk and Compliance In 2009, the group appointed a Group Head of Risk and Compliance to provide independent oversight of the group s risk governance and risk management processes. The Group Head of Risk and Compliance reports on an operational level to the Group Chief Executive (in 2008 the Chief Risk Officer reported to the Group Finance Director), has direct access to the Risk and Compliance Committee and reports regularly to Risk and Compliance Committee. The Group Head of Risk and Compliance is tasked with: Risk Identification and Assessment The risk identification and assessment process is overseen by the Group Head of Risk and Compliance, and supported by the Group Risk department. Significant input is also provided by relevant senior management and the specific risk committees. The risk identification and assessment process operates within a clearly defined structure following four distinct steps. 1. Risk investigation Through a consultative process involving relevant members of group senior management and business unit leaders, risks facing the group are monitored on an ongoing basis and formally reviewed on an annual basis. The risk identification process utilises a top down approach to identifying significant risks for the group supported by a bottom up risk identification exercise carried out at business unit level. 2. Determination of materiality The group has a clearly defined definition of materiality in relation to risk assessment. This definition, which is approved by the board, is applied to all identified risks to determine which risks are material for the group. The materiality assessment is ratified with group senior management and relevant business leaders. The determination of a risk s materiality follows an iterative approach as represented in the chart below. Developing and maintaining the group s ERM structure; Developing and maintaining the group s ICAAP; Providing independent risk advice to senior management throughout the group; Identifying material risks for the group and developing appropriate responses to such risks; and Policing group-wide adherence to risk policies and the group s risk appetite statement. 1 Is the risk (likely to be) significantly capital consuming? No, or difficult to quantify 2 In a worst case scenario, is the risk reputation hitting, liquidity pressing or damaging to regulatory compliance? Yes Yes Risk material Risk material Iteration No The Group Head of Risk and Compliance is a member of the executive management team and of all risk committees within the group and directly manages a team of risk professionals at group level. 3 Considering other relevant information (e.g. peer benchmarks), do you consider this risk material? No Yes Risk material Risk immaterial 38

39 Risk Management 3. Risk treatment For each identified risk the group s approach to management of the risk is established. Risk management techniques include (but are not limited to) limitation, monitoring, mitigation and capitalisation. 4. Documentation and recording The risk assessment and treatment of all material risks is documented in full. Documentation is ratified by the relevant risk committees. Stress Testing and Scenario Analysis The group carries out scenario and stress testing for both the banking business and the insurance and investment business as well as at a combined group level. Stress tests consider various combinations of economic parameters reflecting different stress scenarios. From this, the group s capital adequacy is determined at a confidence level linked to the group s desired credit rating over a three-year time horizon. Stress testing is also performed in the context of credit losses, funding issues and market shocks to help inform business policy. Stress scenarios are based on extreme, but plausible, negative events. The associated economic environment relevant to each scenario is established though a consultative process involving group senior management and external experts. Determination of certain macroeconomic drivers for each scenario allows the group s models to determine expected asset returns and forecast the risk profile of the group given the stressed environment. Stressed capital adequacy projections under each scenario provide senior management with information incorporated in the strategic planning process. Economic Capital The group has elected to use Economic Capital as its core unit of risk currency. Internal economic capital models allow the group to allocate economic capital by business activity. The group will continue to develop its economic capital methodologies to support risk measurement and riskbased decision making at all levels of the business through hurdle rates calculated off Risk Adjusted Return on Capital ( RAROC ). Overview Business Review Corporate Governance Financial Statements 39

40 Corporate Responsibility 40 Corporate Responsibility Agenda Corporate Responsibility ( CR ) refers to how the group views its obligations to each of its stakeholders: customers, employees, shareholders and the wider community in which the group operates, together with how it lives up to these obligations in practice. Customers Customer Satisfaction Results Irish Life Retail 78.4% 80.1% 80.0% Irish Life Corporate 92.6% 89.1% 87.6% permanent tsb 82.5% 82.7% 84.2% Irish Life & Permanent ( IL&P ) engages with its customers through customer satisfaction programmes- Intouch (Irish Life Retail), BORU (Irish Life Corporate) and Customer Central (permanent tsb). Customer satisfaction is measured using indices based on the results of customer surveys. In Irish Life Retail, customer satisfaction is measured monthly using a sample of customers who have experienced one of five key interactions with the company New Business, Financial Review, Customer Service Centre, Withdrawal, or a Complaint. The customer satisfaction index is calculated using a mix of customers experience in core criteria such as the value for money of their product or how Irish Life treats them as a person, and also then using criteria related to the specific interaction or transaction that they had with the company. The Irish Life Corporate Business ( ILCB ) customer service index measures actual performance against target service levels across twelve key administrative services carried out for clients. ILCB also commissions an independent yearly survey of brokers and consultants to assess their levels of satisfaction with insurance companies operating in the group business area. This survey is carried out by Millward Brown IMS. In permanent tsb, there are three methods of assessing performance on customer service: An annual customer satisfaction index ( CSI ) where 2,500 customers are asked their views on service across 28 measures of performance; Nightly Moments of Truth surveys where customers are asked to comment on their branch experiences within 24 hours of attending the branch (10,000 customers surveyed in 2009); and Participation in a pan European retail banking service quality study involving over 40 other banks in 17 countries. Employees Summary Workforce Data Average Total number Training and annual of employees development Year turnover at year end days % 5,024 14, % 5,490 17, % 5,607 16,600 In common with all businesses in Ireland, the group is dealing with the consequences of the economic recession and a reduction in business activity. This has resulted in reduced demand for products and services and a need to reduce costs and cut job numbers. Group policy is to manage this as far as possible through career breaks and reduced working time under the group s flexible working policy. However, it has also been necessary to implement limited voluntary severance and voluntary early retirement schemes in a number of businesses. Total group employee numbers have fallen from a peak of 5,607 at the end of 2007 to 5,024 at the end of Reductions have taken place across all businesses. This includes 225 employees who are on career break at the end of 2009 and 57 who have availed of voluntary severance and voluntary early retirement schemes during the year. There was a sharp reduction in employee turnover in 2009 to 7.8% - approximately half the level of the previous two years. Data on the composition of the workforce is published each year in the group CR Report including gender, age profile and length of service. The reduced level of training days in 2009 is partly due to a significant change in the way training is delivered. An increasing proportion of employee training now takes place through a variety of techniques including: coaching / mentoring self directed study Point of Sale observation and support elearning. The group runs Health & Well-being programmes each year in Irish Life and permanent tsb. Activities and topics covered in 2009 included physical fitness, childcare solutions and healthy eating. Community Activities The group s main community programmes to date are built on a partnership approach to community involvement. In 2006, three partners were selected with the necessary scale and expertise to work with IL&P to develop the group s main community programmes.

41 Corporate Responsibility These were: Community Partner Programme Age Action Ireland Care & Repair Services for older people in Ireland Trinity Foundation Trinity long-term study on ageing in Ireland Foróige The permanent tsb Foróige Youth Citizenship Awards IL&P s commitment to the Trinity long-term ageing study runs for ten years and, for the other two programmes, the initial commitment was for three years. However, in both cases the partnerships have now been extended for a further two years to the end of The main programmes account for approximately 75% of total community budgets. The balance is used to fund a range of other activities: Staff charities: all funds raised by employees for charities selected by them are matched by IL&P; Small donations to charities and community organisations; and Mentoring programme for school students. Total investment in community programmes and activities last year was 1.3m compared with 2m in This reflects reduced funding for all programmes in line with the more difficult business environment and cutbacks in discretionary expenditure. In addition, the group made a loan contribution of 750,000 to the Social Finance Foundation to support community-based projects around Ireland. The Age Action Ireland Care & Repair services have developed through the creation of franchises and 18 of these were in place around the country at the end of In May 2009, President Mary McAleese formally launched the Irish long-term study on ageing (TILDA) at Trinity College, Dublin. This also marked the beginning of the public phase of the study that involves interviewing 8,000 to 10,000 older people every two years to collect detailed information on all aspects of their lives including health, economic and social dimensions. The total cost of the study is estimated at 29m funded by the Irish Government, The Atlantic Philanthropies and Irish Life marked the third year of permanent tsb s sponsorship of the Foróige Youth Citizenship Programme and Awards. The programme has a very clear structure for the young people involved with a three-stage process of Awareness Action Evaluation. Foróige review the support material for the programme regularly, hold workshops to explain how the process works and give very clear feedback on results to all participants. Environment Total energy consumption (GWh) Green energy (%) CO 2 emissions (tonnes)* 10,306 11,695 11,471 Total waste (tonnes) 1,258 1,636 1,520 Waste recycled (%) At the end of 2008, the group set a target to apply for accreditation to the International Standards IS393 and IS14001 by year-end Significant progress was made on this objective but an independent review of the system indicated that further actions were required. Most of the additional requirements have now been completed and it is planned to submit the application in quarter 2, *The group has adopted greenhouse gas conversion factors published by the Carbon Trust in the UK in April 2008 for calculating CO 2 emissions for the 2009 CR Report and prior year numbers have been restated. Total energy consumption in 2009 at 26.8 GWh showed a reduction of 4% in This was mainly due to vacating premises and reduced energy use in a group head office building occupied by Irish Life Investment Managers. In 2009, 30% of total energy used came from renewable sources. As regards waste management, the group has recycling facilities in place in almost all of its offices and recycles almost 80% of all waste produced. During 2009, an organic waste recycling machine (ecorect) was tested in the staff restaurant in the group head office. This machine reduces organic waste by up to 90% and converts it to multi-purpose biomass particles. The test was successful and, subject to cost, one of these machines will be installed in In 2009, Irish Life was selected from 12,000 organisations in 80 countries as the overall winner of the Plain English 30 th Anniversary Award. In the UK, Capital Homeloans Limited. achieved 19 th position in the Sunday Times Top 100 Best Small Companies to Work for survey. A full review of IL&P s work in this area can be found in its sixth annual Corporate Responsibility Report. This report is available on the group website 41 Overview Business Review Corporate Governance Financial Statements

42 Board of Directors Gillian Bowler (57) Chairman A member of the board of Irish Life since July A non-executive director of Grafton Group plc and of the Voluntary Health Insurance Board and former Chairman of Fáilte Ireland. She is a past President of the Institute of Directors and a director of a number of other companies. Kevin Murphy (58) Group Chief Executive Group Chief Executive appointed in June An actuary and an employee of Irish Life since 1972, he was appointed a main board director following the merger of Irish Life and Irish Permanent in He is a director of a number of companies within the group including the associated company Allianz-Irish Life Holdings plc. He is President of the Society of Actuaries in Ireland and is a member of the board of the Irish Stock Exchange. Breffni Byrne (64) Non-Executive Appointed to the board in July He is Chairman of NCB stockbrokers and a non-executive director of Coillte Teoranta, Tedcastle Holdings Limited, Hikma plc, Cpl Resources plc and a number of other companies. A chartered accountant, he was formerly a Senior Partner of Arthur Andersen in Ireland and Director of Risk Management for Andersen s audit practice in Scandinavia, the Middle East and Africa. Eamonn Heffernan (65) Non-Executive Appointed to the board in March An actuary, he was formerly a Partner of Mercer Human Resource Consulting. He is a past President of the Society of Actuaries in Ireland and is a former Chairman of the Pensions Board and of the Irish Association of Pension Funds. Roy Keenan (62) Non-Executive Appointed to the board in October He is a former Chief Executive of Bank of Ireland UK and former Managing Director of Bank of Ireland Life and Bank of Ireland Mortgages. He is a non-executive director of Met Life Europe and a number other companies. He is a former council member of the British Bankers Association, the Council of Mortgage Lenders and a former President of the Irish Insurance Federation. David McCarthy (49) Executive Group Finance Director. Appointed to the board in March He is a chartered accountant who formerly worked with Coopers & Lybrand (now PriceWaterhouseCoopers) and was the Group Financial Controller in Irish Permanent plc. He is a director of a number of companies within the group including the associated company Allianz-Irish Life Holdings plc. Board Committees 42 Audit Breffni Byrne (Chairman) Margaret Hayes Roy Keenan Pat Ryan Remuneration and Compensation Danuta Gray (Chairman) Gillian Bowler Eamonn Heffernan Ray MacSharry Pat Ryan Nomination Gillian Bowler (Chairman) Breffni Byrne Danuta Gray Roy Keenan Ray MacSharry Risk and Compliance Pat Ryan (Chairman) Breffni Byrne Bernard Collins Eamonn Heffernan Roy Keenan Liam O Reilly

43 Board of Directors Bernard Collins (61) Non-Executive Appointed to the board in March 2010 he was formerly vice president of international operations and director of the international board of Boston Scientific Corporation. He is currently a non-executive director of IDA Ireland and a number of other companies in the medical device/life science sectors. He is also currently chairman of the VHI. Ray MacSharry (71) Non-Executive Appointed to the board in December He is a former EU Commissioner, Minister for Finance, Minister for Agriculture and Governor of the European Investment Bank. He has served as a non-executive director of Bank of Ireland Group, Jefferson Smurfit Group plc and Ryanair plc and is former Chairman of London City Airport, Green Property plc and eircom plc. Danuta Gray (51) Non-Executive Appointed to the board in August She is Chief Executive Officer of O2 Ireland, a position she has held since Prior to her move to Ireland, she held the position of Director for BT Europe in Germany and previous to that was General Manager at BT Mobile in the UK. She is chairperson of Barretstown and is a non-executive director of Aer Lingus plc. Liam O Reilly (62) Non-Executive Appointed to the board in September He was formerly Chief Executive of the Irish Financial Services Regulatory Authority. He is former Chairman of the Chartered Accountants Regulatory Board and a Director of Merrill Lynch International Bank Limited. He served on the Review Group on Auditing in Ireland and he was formally a member of the UK Accounting Foundation. Margaret Hayes (55) Non-Executive Appointed to the board in December She is a member of the Irish bar and a former Secretary General of the Departments of Tourism and Trade, Sport and Recreation and of Community, Rural and Gaeltacht Affairs. She recently retired as chairman of the Health and Social Care Professionals Council and is the outgoing chairman of the National Performance Verification Group for the Health Sector. She is also a member the panel of interviewers for the Public Appointments Commission. Pat Ryan (63) Non-Executive Appointed to the board in December 2009, he was formerly Group Treasurer and Chief Risk Officer of Allied Irish Bank plc. He retired from the AIB Group in 2002 and is currently a director of AXA Life Europe Limited and J&E Davy. He holds an M.Sc in Economics from University College Dublin, and is a fellow of the Institute of Bankers. He is a fellow of the Society of Actuaries in Ireland and the Institute of Actuaries. Ciarán Long (57) Company Secretary An employee of Irish Life since He is an actuary and most of his time with Irish Life has been spent in the pensions area. He is a company appointed trustee in each of the staff pension schemes. Ciarán is a former Director of the Retirement Planning Council and is a former member of the Pensions Board. He was appointed Company Secretary in May Overview Business Review Corporate Governance Financial Statements

44 Directors Report 44 The directors present their annual report and audited consolidated and company financial statements to the shareholders for the. Results The group loss after tax and non-controlling interests for the year was 313m (2008: 49m profit) and was arrived at as shown in the consolidated income statement on page 69. No dividends (2008: 207m) were paid during the year. 107m has been transferred from distributable to non-distributable reserves (2008: 8m transferred from distributable to non-distributable reserves) and distributable reserves have been increased by 9m in respect of the sale of own shares acquired for the benefit of policyholders (2008: 3m). Dividends No dividends were paid or proposed for 2009 (2008: 62m). Review of the Business and Likely Future Developments A detailed review of the group s performance during the year and an indication of likely future developments are set out in the Chairman s Statement on pages 4 and 5, Group Chief Executive s review on pages 6 and 7 and the Business Review on pages 8 to 41. Information on the key performance indicators and principle risks and uncertainties in the business as required by European Accounts Modernisation Directive (2003/51/EEC) are included in the Business Review on pages 8, 20, 25, 27 and 30 to 33. Accounting Policies As required by European Union ( EU ) law from 1 January 2005, the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) and adopted by the EU as set out in group accounting policies in Note 1 to the financial statements. Corporate Governance The report on Corporate Governance is set out on pages 50 to 55 and forms part of the directors report. Directors The names of the directors, together with a short biographical note on each, appear on pages 42 and 43. David McCarthy was co-opted to the board in March 2009 as an executive director. Pat Ryan was co-opted to the board in December 2009 as a nonexecutive director. Bernard Collins was co-opted to the board in March 2010 as a non-executive director. Denis Casey and Peter Fitzpatrick resigned from the board in February Finbar Sheehan retired from the board in May Eamonn Heffernan and Liam O Reilly will retire from the board at the 2010 AGM and will not offer themselves for re-appointment. All other directors will retire at the 2010 AGM and, being eligible, will offer themselves for re-appointment. Details of the directors and secretary s interest in the share capital of the company and of transactions involving directors are set out in Note 54 Related parties to the financial statements. None of the directors service contracts have notice periods exceeding twelve months. Share Capital and Shareholders Authorised Share Capital (a) The authorised share capital of the company is 428,000,000 divided into 400,000,000 Ordinary Shares of 0.32 each and 300,000,000 Non-Cumulative Preference Shares of 1 each ( Euro Preference Shares ), STG 100,000,000 divided into 100,000,000 Non-Cumulative Preference Shares of STG 1 each ( Sterling Preference Shares ) and US$200,000,000 divided into 200,000,000 Non-Cumulative Preference Shares of US$1 each ( Dollar Preference Shares ). The company has only one class of issued shares and as at 31 December 2009, it had 276,782,351 Ordinary Shares in issue in that class. During 2009, no shares were issued under the group s share option and profit share schemes. At 31 December 2009 Irish Life Assurance plc, a subsidiary of the group, held 7.1m (2008: 8.9m) shares representing 2.6% (2008: 3.2%) of the issued share capital of the company. These shares are held on behalf of policyholders and in accordance with Section 9(1) of the Insurance Act, 1990, carry no voting rights. In addition, at 31 December 2009 Irish Life & Permanent plc holds, through an employee benefit trust, 457,914 shares (2008:

45 Directors Report 457,914) in anticipation of share awards that may vest under the long-term incentive plan for senior management. Each Ordinary Share carries one vote and the number of voting rights as at 31 December 2009 was 269,674,169 (2008: 267,912,020). Preference Shares The general rights attaching to Sterling Preference Shares, Euro Preference Shares and Dollar Preference Shares ( Preference Shares ) shall rank pari-passu as regards the right to receive dividends and the rights on a winding-up of, or other return of capital by, the company. Notwithstanding, such Preference Shares may be issued with such rights and privileges, and subject to such restrictions and limitations, as the directors shall determine in the resolution approving the issue of Preference Shares. Whenever the directors have power to determine any of the rights, privileges, limitations or restrictions attached to any of the Preference Shares, the rights, privileges, limitations or restrictions so determined need not be the same as those attached to the Preference Shares which have then been allotted or issued. Preference Shares which have then been allotted or issued shall constitute a separate class of shares. Preference Shares shall entitle the holders thereof to receive a Non-Cumulative Preferential Dividend ( Preference Dividend ) which shall be calculated at such annual rate (whether fixed or variable) and shall be payable on such dates and on such other terms and conditions as may be determined by the directors prior to allotment thereof. Provisions applying to Preference Shares The following provisions shall apply in relation to any particular Preference Shares if so determined by the directors prior to the allotment thereof: a. the Preference Shares shall rank as regards the right to receive dividends in priority to any Ordinary Shares in the capital of the company; b. a Preference Dividend may only be paid from distributable profits and distributable reserves of the company; c. a Preference Dividend may only be paid if it would not breach or cause a breach of the Central Bank of Ireland s capital adequacy requirements from time to time applicable to the company; d. Preference Shares shall carry no further right to participate in the profits and reserves of the company other than the Preference Dividend and if on any occasion an instalment of the Preference Dividend is not paid in cash for the reasons described in sub-paragraph (b) or sub-paragraph (c) above, the preference shareholders shall have no claim in respect of such instalment; and e. each holder of Preference Shares shall, on the date for payment of Preference Dividend instalment, if such instalment had not been paid in cash, be allotted such additional nominal amount of Preference Shares of the class in question, credited as fully paid, as is equal to an amount which would have been paid to the holder had such relevant instalment been paid in cash plus an amount equal to the associated tax credit to which the holder would have been entitled had the relevant instalment been paid in cash. Capital On a winding-up of, or other return of capital (other than on a redemption of shares of any class in the capital of the company) by the company, the preference shareholders shall in respect of the Preference Shares held by them be entitled to receive, out of the surplus assets available for distribution to the company s members, an amount equal to the amount paid up or credited as paid up on the Preference Shares (including any premium paid to the company in respect thereof) together with any Preference Dividend which is due for payment after the date of commencement of the winding-up or other return of capital but which is payable in respect of a period ending on or before such date and any Preference Dividend accrued prior to the date of return of capital. 45 Overview Business Review Corporate Governance Financial Statements

46 Directors Report 46 Preference Shares (continued) The amounts payable or repayable in the event of a winding-up of, or other return of capital (other than on a redemption of shares of any class in the capital of the company) by, the company, shall be so paid pari-passu with any amounts payable or repayable in that event upon or in respect of any further Preference Shares of the company ranking pari-passu with the Preference Shares as regards repayment of capital, and shall be so paid in priority to any repayment of capital on any other class of shares of the company. The preference shareholders shall not be entitled in respect of the Preference Shares held by them to any further or other right of participation in the assets of the company. Redemption Unless otherwise determined by the directors either generally or in relation to any particular Preference Shares prior to allotment thereof, the Preference Shares shall, subject to the provisions of the Acts, be redeemable at the option of the company where the company shall give to the holders of the Preference Shares to be redeemed not less than 30 days and not more than 60 days notice in writing of the date on which such redemption is to be effected. Voting The preference shareholders shall be entitled to receive notice of any General Meeting of the company and a copy of every circular or other like document sent out by the company to the holders of Ordinary Shares and to attend any General Meeting of the company but shall not, in respect of the Preference Shares, be entitled to speak or vote upon any resolution other than a resolution for winding-up the company or a resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the relevant Preference Shares unless at the date of such meeting the most recent instalment of the Preference Dividend due to be paid prior to such meeting shall not have been paid in cash in which event the preference shareholders shall be entitled to speak and vote on all resolutions proposed at such meeting. At a separate General Meeting of any class of preference shareholders, on a show of hands each preference shareholder present in person shall have one vote and on a poll each preference shareholder present in person or by proxy shall have one vote in respect of each Preference Share held by him and whenever preference shareholders are entitled to vote at a General Meeting of the company then, on a show of hands, each preference shareholder present in person shall have one vote and on a poll each preference shareholder present in person or by proxy shall have such number of votes in respect of each Preference Share held by him as the directors may determine prior to the allotment of such shares. If the most recent instalment of the Preference Dividend has not been paid a majority of any class of Preference Shares in issue may requisition, and the directors shall procure, that an Extraordinary General Meeting of the company shall be convened forthwith. Restriction on Capitalisation Save with the written consent of the holders of not less than 66 2 /3% in nominal value of each class of Preference Shares, or with the sanction of a resolution passed at a separate General Meeting of the holders of each class of Preference Shares where the holders of not less than 66 2 /3% in nominal value of the relevant class of Preference Shares have voted in favour of such resolution, the directors shall not capitalise any part of the amounts available for distribution if, after such capitalisation the aggregate of such amounts would be less than a multiple, determined by the directors prior to the allotment of each class of Preference Shares, of the aggregate amount of the annual dividends (exclusive of any associated tax credit) payable on Preference Shares then in issue ranking as regards the right to receive dividends or the rights on winding-up of, or other return of capital by the company, paripassu with or in priority to the Preference Shares, or authorise or create, or increase the amount of, any shares of any class or any security convertible into the shares of any class ranking as regards the right to receive dividends or the rights on winding up of, or other return of capital by the company, in priority to the Preference Shares.

47 Directors Report Further Preference Shares The company may from time to time create and issue further Preference Shares ranking as regards participation in the profits and assets of the company pari-passu with the Preference Shares and so that any such further Preference Shares may be denominated in any currency and may carry as regards participation in the profits and assets of the company rights identical in all respects to those attaching to the Preference Shares or rights differing therefrom. The creation or issue of, or the variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to, any shares of the company ranking after the Preference Shares as regards participation in the profits and assets of the company and, provided that, on the date of such creation or issue, the most recent instalment of the dividend due to be paid on each class of Preference Share in the capital of the company prior to such date shall have been paid in cash, the creation or issue of further Preference Shares ranking pari-passu with the Preference Shares as provided for above, shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attached to the Preference Shares. If any further Preference Shares of the company shall have been issued, then any subsequent variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to any of such further Preference Shares shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attaching to the Preference Shares, provided that the rights attaching to such further Preference Shares thereafter shall be such that the creation and issue by the company of further Preference Shares carrying those rights would have been permitted. Variation of Rights Whenever the share capital is divided into different classes of shares, the rights attached to any class may be varied or abrogated with the consent in writing of the holders of three-quarters in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate General Meeting of the holders of the shares of the class, and may be so varied or abrogated either whilst the company is a going concern or during or in contemplation of a winding-up. Allotment of Shares Subject to the provisions of the Articles of Association relating to new shares, the shares shall be at the disposal of the directors and (subject to the provisions of the Articles and the Acts) they may allot, grant options over or otherwise dispose of them to such persons on such terms and conditions and at such times as they may consider to be in the best interests of the company and its shareholders, but so that no share shall be issued at a discount and so that, in the case of shares offered to the public for subscription, the amount payable on application on each share shall not be less than one-quarter of the nominal amount of the share and the whole of any premium thereon. Holders Resident in the USA The board may at its discretion give notice to certain holders resident in the USA calling for a disposal of their shares within twenty one days or such longer period as the board considers reasonable. The board may extend the period within which any such notice is required to be complied with and may withdraw any such notice in any circumstances the board sees fit. If the board is not satisfied that a disposal has been made by the expiry of the twenty one day period (as may be extended), no transfer of any of the shares to which the notice relates may be made or registered other than a transfer made pursuant to a procured disposal of the said shares by the board, or unless such notice is withdrawn. 47 Overview Business Review Corporate Governance Financial Statements

48 Directors Report Refusal to Transfer The directors in their absolute discretion and without assigning any reason therefore may decline to register: I. any transfer of a share which is not fully paid save however, that in the case of such a share which is admitted to listing on the Stock Exchange, such restriction shall not operate so as to prevent dealings in such share of the company from taking place on an open and proper basis; II. any transfer to or by a minor or person of unsound mind; or The directors may decline to recognise any instrument of transfer unless: III. the instrument of transfer is accompanied by the certificate of the shares to which it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer (save where the transferor is a Stock Exchange Nominee); IV. the instrument of transfer is in respect of one class of share only; with a rights issue to deal with legal or practical problems that may arise in respect of shareholders resident in certain territories and / or to deal with any fractional entitlements or any other issue of equity securities for cash up to an aggregate nominal amount of 5% of the nominal value of the company s issued share capital. This authority was last granted by shareholders at the Company s AGM on 15 May 2009 and will expire on the earlier of the date of the next AGM or 15 August Change of Control of the Company (c) If any person or company obtains control of the company, the company s share option schemes contain provisions for the exercise of share options, provided these have not lapsed, even if the performance conditions have not been satisfied or, with the agreement of an acquiring company, exchange the subsisting options for new options in the acquiring company. Following the acquisition of the Irish Life & Permanent plc by Irish Life & Permanent Group Holdings plc in January 2010, the subsisting options were exchanged for new options in Irish Life & Permanent Group Holdings plc. 48 V. the instrument of transfer is in favour of not more than four transferees; and VI. it is lodged at the office or at such other place as the directors may appoint. Annual General Meetings (b) At its annual general meetings, the members normally authorise the company: To allot relevant securities within the meaning of section 20 of the Companies (Amendment) Act, 1983 up to a maximum amount equal to the aggregate of the authorised but as yet un-issued Ordinary Share capital of the company. This authority was last granted by shareholders at the company s Annual General Meeting ( AGM ) held on 20 May 2005 for a period of five years. To disapply the strict statutory pre-emption provisions in connection The company s Long-term Incentive Plan contains similar provisions where awards may vest immediately to the extent determined by the directors or, with the agreement of an acquiring company, exchange the subsisting awards for new awards in the acquiring company. Following the acquisition of the Irish Life & Permanent plc by Irish Life & Permanent Group Holdings plc in January 2010, the subsisting awards were exchanged for new awards in Irish Life & Permanent Group Holdings plc. (d) In the event of a change of control of the company, there are no agreements (other than under normal employment contracts) between the company, its directors or employees providing for compensation for loss of office that might occur.

49 Directors Report Accounting Records The directors believe that they have complied with Section 202 of the Companies Act, 1990 with regard to books of account by employing financial personnel with appropriate expertise and by providing adequate resources to the financial function. The books of account of the company are maintained at the company s registered office, Irish Life Centre, Lower Abbey Street, Dublin 1 and the principal offices of the group and its subsidiaries, as shown on the inside back cover of this report. Event after the Reporting Period As detailed in Note 56 of the financial statements, on 15 January 2010, Irish Life & Permanent plc was acquired by Irish Life & Permanent Group Holdings plc and on 18 January 2010 was delisted from the London and Irish stock exchanges. Political Donations The directors have satisfied themselves that there were no political contributions during the year, which require disclosure under the Electoral Act, On behalf of the Board Gillian Bowler Chairman David McCarthy Group Finance Director 23 March 2010 Kevin Murphy Group Chief Executive Ciarán Long Company Secretary Subsidiaries and Associated Companies The principal subsidiaries and associated undertakings and the group s interests therein are shown in Note 53 Principal subsidiary and associated undertakings of the group financial statements. Branches outside the State Irish Life & Permanent plc has established branches, within the meaning of Regulation 25 of the European Communities (Accounts) Regulations, 1993 (which gave effect to EU Council Directive 89/666/EEC), in the United Kingdom. Independent Auditor In accordance with Section 160 (2) of the Companies Act, 1963 the Auditor, KPMG, Chartered Accountants and Registered Auditor, will continue in office. Overview Business Review Corporate Governance Financial Statements 49

50 Corporate Governance 50 Combined Code on Corporate Governance The directors endorse the Combined Code on Corporate Governance ( the Code ) issued by the Financial Reporting Council which sets out Principles of Good Governance and a Code of Best Practice. The Listing Rules of the Irish and London Stock Exchanges require a statement to be made in relation to compliance with the Code. The directors have reviewed the group s corporate governance arrangements in light of the Code and believe that they are fully in compliance. The directors have developed a code of practice which deals with, among other matters, issues of corporate governance. This code of practice is designed to ensure that the main principles and the supporting principles of good governance set out in Section 1 of the Code are applied within the group. Certain transactions between the group and Anglo Irish Bank Corporation Limited were made public in February 2009 and following this the board commissioned international risk management and strategy consultants Oliver Wyman to review the group s Corporate Governance framework and to advise on any changes necessary to ensure the group was operating in line with emerging international best practice. The board accepted the recommendations made by Oliver Wyman in this regard, and the following measures were taken in line with that report: The group separated the reporting lines of Internal Audit and Risk Management from Finance; The group upgraded the risk management function of the group and appointed a new Group Head of Risk and Compliance, who sits on the executive management team to input a risk perspective into all key decisions by the group; The group reviewed and strengthened the risk and control processes throughout the organisation; and The group has taken steps to improve management communication and reporting to the Board and improve board oversight of risk and control issues. Role of the Board There is an effective board to lead and control the group. The board has reserved to itself for decision a formal schedule of matters pertaining to the group and its future direction such as the group s commercial strategy, major acquisitions and disposals, board membership, appointment and removal of the Group Chief Executive and the Company Secretary, executive remuneration, trading and capital budgets and risk management policies. All strategic decisions are referred to the Board. Documented rules on management authority levels and on matters to be notified to the board are in place, supported by an organisational structure with clearly defined authority levels and reporting responsibilities. The board currently comprises ten non-executive and two executive directors. Biographies of each of the directors are set out on pages 42 and 43. The roles of the Chairman and the Group Chief Executive are separated and are clearly defined, set out in writing and agreed by the board. The board considers all the non-executive directors to be independent of management and free of any business or other relationship which would interfere with the exercise of their independent judgement. The Chairman, on appointment, met the independence criteria set up in the Code. The board has nominated Roy Keenan as the senior independent non-executive director. The board had nine scheduled board meetings during 2009 and also met on other occasions as considered necessary. Full board papers are sent to each director in sufficient time before board meetings and any further papers or information are readily available to all directors on request. The board papers include the minutes of all committee meetings which have been held since the previous board meeting and the chairman of each committee is available to report on the committee s proceedings at board meetings if appropriate. Attendance at scheduled board and committee meetings is outlined on page 55. The board receives formal reports on group compliance matters at each of its meetings. The board has a formal performance review process to assess how the board and its committees are performing. This process, facilitated every three years by external consultants, comprises a detailed and rigorous examination by directors of all aspects of board and committee performance. A report produced by the consultants identifies any measures which can enhance this performance and these are considered by the full board. The performance of each individual non-executive director is assessed on an annual basis by the Chairman and is discussed with the director concerned. The non-executive directors, led by the senior independent director, evaluate the performance of the Chairman, taking into account the views of executive directors.

51 Corporate Governance The Chairman meets at least once a year with the nonexecutive directors without the executives present. Procedures are in place for directors, in furtherance of their duties, to take independent professional advice and training, if necessary, at the group s expense. The group has arranged directors and officers liability insurance cover in respect of legal action against its directors. Appropriate training is arranged for directors on first appointment and the Chairman also ensures that the directors continually update their skills and knowledge through appropriate seminars and presentations. The Company Secretary is responsible for advising the board through the Chairman on all governance matters. All directors have direct access to the Company Secretary. Where directors have concerns which cannot be resolved about the running of the company or a proposed action, they will ensure that their concerns are recorded in the board minutes. On resignation, nonexecutive directors will provide a written statement to the Chairman, for circulation to the board, if they have such concerns. Board Committees The board has established a number of committees which operate within defined terms of reference. These committees are the Audit Committee, the Risk and Compliance Committee, the Remuneration and Compensation Committee and the Nomination Committee, all of which are committees of the board. All of these committees are composed of non-executive directors all of whom are considered by the board to be independent. Membership and chairmanship of each committee is reviewed at least every two years. Detailed terms of reference for each of the committees are available on request and on the group s website www. irishlifepermanent.ie. In accordance with the terms of the Code, the Chairman of the group is not a member of the Audit Committee. Following the establishment of Irish Life & Permanent Group Holdings plc, terms of reference of each board committee will be identical for each of Irish Life & Permanent plc and Irish Life & Permanent Group Holdings plc. Audit Committee The Audit Committee comprises Breffni Byrne (Chairman), Margaret Hayes, Roy Keenan and Pat Ryan. The board ensures that the chairman of the committee has recent and relevant financial experience. The Audit Committee provides a link between the board and the external auditors, is independent of the group s management and is responsible for making recommendations in respect of the appointment of external auditors and for reviewing the scope of the external audit. It also has responsibility for reviewing the group s annual report and financial statements, preliminary announcement, half-yearly reports, interim management statements and the effectiveness of the group s internal control systems and risk management process. The committee monitors the group s internal audit, compliance and risk management procedures and considers issues raised and recommendations made by the external auditors and by the internal audit, compliance and risk management functions of the group. The committee meets at least annually with the external auditors in confidential sessions without management being present. The committee reviews the arrangements by which staff of the group may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The Audit Committee reviews the non-audit services provided by the external auditors based on the policy approved by the board in relation to the provision of such services. Fees paid in respect of audit, audit related and non-audit services are outlined in Note 46 Administration and other expenses to the Group Financial Statements. Audit related services are services carried out by the auditors by virtue of their role as auditors and include assurance related work, regulatory returns and accounting advice. The non-audit services provided principally relate to tax advice. In line with best practice, the auditors do not provide services such as financial information system design and valuation work which could be considered to be inconsistent with the audit role. Risk and Compliance Committee The Risk and Compliance Committee comprises Pat Ryan (Chairman), Breffni Byrne, Bernard Collins Eamonn Heffernan, Roy Keenan and Liam O Reilly. The board ensures that the chairman of the committee has relevant risk management and / or compliance experience. The Risk and Compliance Committee has responsibility for oversight and advice to the board on risk governance, the current risk exposures of the group and future risk strategy, including strategy for capital and liquidity management, the setting of compliance policies and principles and the embedding and maintenance throughout the group of a supportive culture in relation to the management of risk and 51 Overview Business Review Corporate Governance Financial Statements

52 Corporate Governance Risk and Compliance Committee (continued) compliance. The Risk and Compliance Committee supports the board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the group s strategy is consistent with the group s risk appetite. The Risk and Compliance Committee is responsible for monitoring adherence to the group risk appetite statement. Where exposures exceed levels established in the appetite statement, the Risk and Compliance Committee is responsible for developing appropriate responses. This is facilitated by the periodic review of a key risk indicators report calibrated to the risk appetite statement. The Risk and Compliance Committee, in turn, delegates responsibility for the monitoring and management of specific risks to committees accountable to it. These committees are the Group Credit Committee, the Banking Assets and Liabilities Committee, the Life Assurance Assets and Liabilities Committee, the Group Operational Risk Committee, the Group Counterparty Credit and Market Risk Committee and the Group Compliance Committee. The terms of reference for each committee, whose members include members of group senior management, are reviewed regularly by the Risk and Compliance Committee. The Remuneration and Compensation Committee The Remuneration and Compensation Committee comprises Danuta Gray (Chairman), Gillian Bowler, Eamonn Heffernan, Ray MacSharry and Pat Ryan. This committee considers all aspects of the performance and remuneration of executive directors and senior executives and, having consulted with the Chairman and Group Chief Executive, sets the remuneration of these executives, under advice to other non-executive directors. The committee also has responsibility for setting the remuneration of the Chairman (without the Chairman being present) and the Group Chief Executive. Senior management succession issues are also addressed by this committee. During 2009 the committee used the Executive Compensation Practice of Watson Wyatt for advice on executive director and senior management remuneration. Services provided to the group by other Watson Wyatt practices include the valuation of the Irish Progressive Staff Pension Scheme and tsb Staff Pension Scheme. Nomination Committee This committee comprises Gillian Bowler (Chairman), Breffni Byrne, Danuta Gray, Roy Keenan and Ray MacSharry. The committee is charged with responsibility for bringing recommendations to the board regarding the appointment of new directors and of a new Chairman. The Chairman will not chair the committee when it is dealing with the appointment of a successor to the Chairman. Decisions on board appointments are taken by the full board. The committee uses external consultants to assist in identifying and considering candidates from a wide range of backgrounds in the context of a description of the role and capabilities required for a particular appointment. All directors are subject to election by the shareholders at the first opportunity after their appointment. The committee keeps under review the leadership needs of the group, both executive and non-executive, with a view to ensuring the continued ability of the group to compete effectively in the marketplace. This committee is also responsible for reviewing the effectiveness of the board s operations, including the chairmanship and composition of board committees. Subject to satisfactory performance, non-executive directors are typically expected to serve two threeyear terms, although the board may extend an invitation to serve a further three-year term. The form of appointment letter for non-executive directors is available for inspection and is also included on the group s website ( The remuneration of the non-executive directors is determined by the board within the parameters decided by the shareholders and on the advice of the Chairman and the Group Chief Executive. The term of office of the Chairman is six years regardless of any previous term as a director. The board has adopted a practice of all directors submitting themselves for reelection at each Annual General Meeting. Under the Articles of Association, directors are required to submit themselves to shareholders for re-election to the board every three years. Communication with Shareholders The group has an ongoing programme of meetings between its senior executives, institutional shareholders, analysts and brokers. These meetings, which are governed by procedures designed to ensure that price sensitive information is not divulged, are wide ranging and are designed to facilitate a two-way dialogue based upon the mutual understanding of objectives. 52

53 Corporate Governance In addition, the Chairman attends the announcement of both half-yearly and preliminary final results, to which major shareholders are invited, and where they have the opportunity to question and discuss any issue pertaining to the business. Outside of these occasions major shareholders can meet with the Chairman or the Senior Independent Director on request. In addition, major shareholders are invited to meet newly appointed non-executive directors. The board is kept appraised of the views of shareholders and the market in general through the feedback from the meetings programme and results presentations. Analysts reports on the company are also circulated to the board members on a regular basis. Finally, the group periodically commissions independent sample surveys of shareholders and stockbroker analysts to ascertain market perceptions of the group and any issues arising. The results of these surveys are provided to the board. The annual report is designed, through the Chairman s Statement and the Business Review, in addition to the detailed financial information contained in the report, to present a balanced and understandable assessment of the group s position and prospects. The group uses its internet website ( to provide information and access to investors. The investor relations section of the website is updated with the company s stock exchange releases and formal presentations to analysts and investors as they are made. The directors comply with the Code as it relates to the disclosure of proxy votes, the separation of resolutions and the attendance of Committee Chairmen at the Annual General Meeting. Internal Control The board has overall responsibility for the group s system of internal controls and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. The Code on Corporate Governance has a requirement for the directors to review annually the effectiveness of the group s system of internal controls. This requires a review of the system of internal controls to cover all controls including: Financial Operational Compliance Risk Management. Formal guidance for directors on the implementation of the requirements entitled Internal Control: Guidance for Directors on the Combined Code, was published in September, 1999 ( the Turnbull guidance ). The board has established the procedures necessary to implement the Turnbull guidance and was fully compliant with it during 2009 and up to the date of approval of the financial statements. The Audit Committee has reviewed the effectiveness of this system of internal controls and reported thereon to the board. The board has delegated to executive management the planning and implementation of the system of internal controls within an established framework which applies throughout the group. The directors have responsibility for maintaining a system of internal controls which provides reasonable assurance of effective and efficient operations, internal financial control and compliance with laws and regulations. Risk Management The board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the group. This risk management process is regularly reviewed by the board in accordance with the guidance provided by Turnbull. The board confirms that no significant control weaknesses were identified in the review process. The group s approach to risk management is further detailed on pages 30 to 39. The Audit Committee reviews the internal audit, compliance and risk management programmes. The Group Head of Internal Audit reports regularly to the Audit Committee. The Audit Committee also reviews the half-year and annual financial statements and the nature and extent of the external audit. There are formal procedures in place for the external auditors to report findings and recommendations to the Audit Committee. Any significant findings or identified risks are examined so that appropriate action can be taken. Overview Business Review Corporate Governance Financial Statements 53

54 Corporate Governance 54 Risk Management (continued) The Risk and Compliance Committee monitors total risk levels across the group, in line with the overall policy approved by the Board of Directors. The Risk and Compliance Committee supports the board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the group s strategy is consistent with the group s risk appetite. The Group Head of Risk and Compliance reports regularly to the Risk and Compliance Committee. The group has in place a Speaking Up (or whistleblowing ) Policy, which allows all staff and other people who work with or for the group, to raise any concerns they may have about suspected wrongdoing within the group, and ensures that anyone raising a concern in good faith can feel safe and confident that the group will treat the concern seriously, provide adequate protection and ensure fair treatment for the person raising the concern. In addition, the group has in place a Code of Ethics, which lays down the standards of responsibility and ethical behaviour to be observed by all employees of the group. The group s business involves the acceptance and management of a range of risks. The group s system of internal controls is designed to provide reasonable, but not absolute, assurance against the risk of material errors, fraud or losses occurring. It is possible that internal controls can be circumvented or overridden. Further, because of changes of changes in conditions, the effectiveness of an internal control system may vary over time. There was one material operational event in the early part of 2009, when mismatches arose between the fees charged on fixed rate mortgage switches and the cost of closing fixed rate positions. The annualised impact of this event on net interest margin was approximately 30m. Corrective action has been taken to address the issue that arose and to generally strengthen applicable controls. Internal Control Procedures The group s key internal control procedures include the following: An organisational structure with formally defined lines of responsibility and delegation of authority. Established systems and procedures to identify, control and report on key risks. Exposure to these risks will be monitored mainly by the Risk and Compliance Committee through the operations of the committees accountable to it. These committees include the Group Credit Committee, the Banking Assets and Liabilities Committee, the Life Assurance Assets and Liabilities Committee, the Group Operational Risk Committee, the Group Counterparty Credit and Market Risk Committee and the Group Compliance Committee. Their activities are described in the Business Review on pages 36 to 38. The terms of reference of these committees, whose members include executive directors and senior management, are reviewed regularly by the board. Comprehensive budgeting systems are in place with annual financial budgets prepared and approved by the board. Actual results are monitored and there is regular consideration by the board of progress compared with budgets and forecasts. There are clearly defined capital investment control guidelines and procedures set by the board. Responsibilities for the management of credit, investment and treasury activities are delegated within limits to line management. In addition, management has been given responsibility to set operational procedures and standards in the areas of finance, tax legal and regulatory compliance, internal audit, human resources and information technology systems and operations. The internal audit function, which is centrally controlled (and staffed centrally), monitors compliance with the group s policies and standards and the effectiveness of internal control structures across the group. The work of internal audit follows a risk based approach. The Group Head of Internal Audit reports to the Group Chief Executive and the Audit Committee and has direct access to the Audit Committee. The Audit Committee monitors and reviews the effectiveness of the internal audit activities on an ongoing basis. Compliance in the group is controlled centrally under the Group Head of Risk and Compliance. Divisional compliance officers are in place in all of the group s operating divisions. The Group Head of Risk and Compliance reports to the Group Chief Executive and the Risk and Compliance Committee and has direct access to the Risk and Compliance Committee. There is a risk management framework in place in each business throughout the group whereby executive management reviews and monitors, on an ongoing basis, the controls in place, both financial and non-financial, to manage the risks facing that business.

55 Corporate Governance Going Concern The Board of Directors has reviewed the risk factors, (as discussed in the Business Review on pages 30 to 33), including: credit, market, liquidity, insurance and operational risks which impact on the group s activities and all relevant information to assess the group s ability to continue as a going concern. This review included the impact of the current economic and political factors affecting the group and the industry, the capital position of the regulated entities in the group, the liquidity position and the access to funds for the banking entities. The directors have also taken into account the measures introduced by the Irish Government to improve liquidity, including the Government Guarantee, introduced in September 2008 and the Credit Institutions Eligible Liabilities Guarantee Scheme (the ELG Scheme ) introduced by the Government in December In concluding on the going concern basis the directors have taken into account the Government Guarantee, the ELG Scheme, the ability to use assets as collateral to raise funds and the Government s acknowledgement of the group s importance to the economy as a whole. As a result the directors consider that the group has adequate resources to continue in business for the foreseeable future. For this reason the board continues to adopt the going concern basis in preparing the financial statements. Compliance with the Combined Code on Corporate Governance The Irish Stock Exchange and the UK Listing Authority require listed companies to disclose, in relation to Section 1 of the Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. The company has complied fully throughout the most recent accounting period with the provisions set down in Section 1 of the Code including the application of its principles as set out in this report. The auditor s report within the Annual Report covers their review of the company s compliance with the nine provisions of the Code specified for their review by the Listing Rules of the Irish Stock Exchange. Attendance at Scheduled Board and Board Committee Meetings during the Board Audit and Remuneration Nomination Risk and Compensation A B A B A B A B Non-executive Directors Gillian Bowler Breffni Byrne Danuta Gray Margaret Hayes Eamonn Heffernan Roy Keenan Ray MacSharry Liam O Reilly Pat Ryan Finbar Sheehan Executive Directors Kevin Murphy David McCarthy Denis Casey Peter Fitzpatrick Column A indicates the number of scheduled meetings held during the period the director was a member of the Board and / or Committee. Column B indicates the number of scheduled meetings attended during the period the director was a member of the Board and / or Committee. Overview Business Review Corporate Governance Financial Statements There were also twelve additional unscheduled board and committee meetings held during the year. 55

56 Directors Report on Remuneration This report sets out the remuneration policy for the group s senior executives, including executive directors. Remuneration and Compensation Committee The members and role of the Remuneration and Compensation Committee are outlined on page 52 of the report on Corporate Governance. Remuneration Policy In framing the group s remuneration policy the board confirms that it has complied with the Combined Code on Corporate Governance. The group s policy on senior executive remuneration (including executive directors) is to reward executives competitively in order to ensure that the group continues to attract and retain high calibre executives and that they are properly motivated to perform in the best interests of the shareholders. The policy is also designed to ensure that there are adequate succession plans in place. The Remuneration and Compensation Committee makes recommendations to the board on the group s executive remuneration policy taking into account a number of factors, including the comparative market places in which the group operates and performance relative to these market places. The need to ensure that there is a strong alignment of interest between executives and shareholders is addressed through a combination of rewards which includes annual bonus, share option and long-term incentive schemes. In all cases, rewards are subject to stringent performance criteria which include appropriately balanced reward structures. The Committee seeks external advice on these matters. The Committee has reviewed remuneration policy in the wake of the various external reports on improving the governance and management of reward, particularly the 2009 EU CEBS Remuneration report which the Financial Regulator has recommended be followed. This has resulted in a range of changes in remuneration policy aimed at ensuring remuneration based risks are cogently managed together with the introduction of new oversight of all reward structures and changes. Revised Terms of Reference for the Remuneration and Compensation Committee including improvements to its own operating practice have been approved by the board and are now in place. Non-Executive Directors Non-executive directors are remunerated solely by way of fees in respect of their board membership, full details of which are set out on page 62. Executive Directors The remuneration of the executive directors comprises a basic salary, certain benefits, an annual performance bonus and pension entitlements. In addition, executive directors participate in the group s employee profit sharing scheme, long-term share incentive awards and share option schemes. Each of these elements is discussed below and details of the total remuneration are set out on pages 59 to 62. Basic Salary The basic salary is reviewed annually having regard to competitive market practice and Government guidelines. Benefits Executive directors are entitled to a company car or a car allowance. The group also pays private health insurance on behalf of the directors and their families. In addition, executive directors may avail of subsidised house purchase loans. Loans to executive directors are on the same terms and conditions as loans to other eligible Irish Life & Permanent management. Bonus Bonus awards in any year are determined by the Remuneration and Compensation Committee by reference to the overall profit performance of the group and to performance criteria which are set by the Committee. Bonus awards are geared towards attracting and retaining staff together with aligning their performance with business strategies and plans. The awards extend to 100% of basic salary related to the achievement of stretching performance targets. No bonus payments were made in respect of 2009 to senior executives including executive directors. 56

57 Directors Report on Remuneration Long-term Incentive Plan A long-term incentive plan for senior management was approved by shareholders in Executive directors, in common with other senior executives selected by the Remuneration and Compensation Committee, may be granted certain awards of shares under the plan, which vest for participants on the attainment of certain performance criteria. Awards granted in 2007 and 2008 have a three year performance period and the criteria are: 12.5% of the share awards vest for cumulative return on capital ( ROC ) over the performance period of 48%; 50% of the share awards vest for ROC of 60% and awards will vest on a linear scale between 12.5% and 50% for ROC between 48% and 60%; 12.5% of the share awards vest if the Total Shareholder Return ( TSR ) for the group at least matches the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices; and 50% of the share awards will vest if the TSR for the group exceeds the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices plus 8% p.a. Awards will vest on a linear scale between 12.5% and 50% for TSR between the two levels specified. In any financial year the value of an award (based on share price at the date the award is made multiplied by the number of shares allocated under the award) shall not exceed 100% of a participant s salary. No awards were made in Pensions There are two defined benefit pension arrangements in place for executive directors: Irish Permanent Executive Pension Scheme - Peter Fitzpatrick and David McCarthy are members of this defined benefit scheme. Irish Life Assurance plc Pension Scheme - Denis Casey and Kevin Murphy are members of this defined benefit scheme. The group contributes to these pension schemes. Pension benefits are determined solely in relation to basic salary. The Finance Act 2006 introduced a tax charge on pension assets in excess of the higher of 5m or the value of the individual accrued pension entitlements as at 7 December This is generally referred to as the pension cap. As a result of these legislative changes the board decided in 2007 to offer executive directors and management the option of limiting their pension accrual to the level of the pension cap with a taxable, non-pensionable allowance being paid in lieu of the excess pension accrual with a similar cost to the group. Two of the executives chose this option during This option was withdrawn with effect from 30 June Directors Fees from another Company Where an executive director of the group is remunerated for service as a non-executive director of another company and retains such remuneration, the amount of this remuneration is disclosed. 57 Overview Business Review Corporate Governance Financial Statements

58 Directors Report on Remuneration (Audited) 58 The following sections are audited and form part of the financial statements. Share Option Schemes The group has three share option schemes in place which conform to the guidelines of the Irish Association of Investment Managers and were approved by the shareholders in 1994, 2000 and The option schemes are designed to encourage staff and in particular senior executives to identify with shareholder interests. It is current policy to phase the grant of options. Executive directors, in common with other senior executives, hold options under the 1994 scheme. This scheme is now closed and no further options can be allocated under it. Executive directors and other senior executives may participate in the allocation of options under the 2000 scheme. Executives are selected to participate in this scheme based on performance criteria set by the Remuneration and Compensation Committee. The 2001 scheme is a Revenue-approved share option scheme in which all employees including executive directors of the company and certain subsidiaries may participate. Under this scheme 30% of the options may be granted to key employees with the remaining 70% granted on similar terms to the remaining eligible staff. The Remuneration and Compensation Committee selects key employees which may include executive directors based on performance criteria. Key employees have specialist skills, qualifications and relevant experience which are considered vital to the future success of the group. Options are exercisable under the following circumstances: 1994 scheme options are exercisable if the growth in the group s Earnings per share ( EPS ) exceeds the growth in the CPI over any three years following the grant of the options. Under the 2000 scheme, 50% of the options are exercisable only if growth in the group s EPS in the three-year period after grant exceeds growth in CPI plus 5% p.a. compounded over the period. The balance of the options are exercisable in equal instalments after the fourth and fifth anniversary of the date of grant subject to growth in EPS in the three-year period after grant exceeding growth in CPI plus 10% p.a. compounded and EPS growth being in the top 25% of a peer group of financial service companies. Following the introduction of IFRS and as permitted under the scheme the directors have amended the calculation basis for EPS to reflect the EV earnings basis which the directors believe is a more realistic measure of the performance of a life business and is the measure used by the investment community to assess the performance of life businesses. There is no change to the EPS growth criteria. The requirement that EPS growth be in the top 25% of a peer group of financial services companies has, as permitted under the scheme, been deleted since it is not possible to obtain comparable EPS growth information, following the introduction of IFRS for all quoted companies in Europe in Options under the 2001 scheme are exercisable where EPS growth in any three year period after the granting of the options exceeds the increase in CPI plus 5% p.a. compounded. Options under all of the above schemes are issued at the market price on the day preceding the date of the grant. Options are granted at no consideration. The aggregate exercise price of options granted under the share options schemes may not exceed eight times an executive s emoluments. In total, not more than 15% of the issued share capital of the group can be put under option in any ten-year period. In addition, over any three-year period the number of shares which may be placed under option may not exceed 4.5% of the group s issued share capital. Options lapse if not exercised within ten years of grant. No share options were granted in Profit-sharing Schemes The group operates Revenue-approved employee profit-sharing schemes on terms approved by the shareholders. All employees, including executive directors of the company, and certain subsidiaries who meet the criteria laid down in the schemes, may participate in these schemes. There were no payouts under the profit-sharing schemes in Directors Service Contracts In accordance with the recommendation of the Combined Code on Corporate Governance there are no directors service contracts with notice periods exceeding twelve months or with provisions for predetermined compensation on termination which exceeds one year s salary and benefits.

59 Directors Report on Remuneration (Audited) Executive Directors Remuneration and Pension Benefits The remuneration payable (excluding pension contributions by the group) to executive directors who held office for any part of the financial year is as follows: Payment in Benefit in Other Salary lieu of notice Kind remuneration* Total Denis Casey , , , Peter Fitzpatrick Kevin Murphy David McCarthy ,430 1,955 1, , ,551 2, Denis Casey retired from the board on 28 February Denis Casey s employment terminated on 14 May 2009; salary payments are included up to this date. In addition to salary Denis Casey received a payment in lieu of notice 1,249,000 in accordance with his contractual entitlements. 2. Peter Fitzpatrick retired from the board on 13 February 2009 and ceased employment from the same date. In addition to salary Peter Fitzpatrick received a payment in lieu of notice 540,000 in accordance with his contractual entitlement. 3. Kevin Murphy s annual salary in line with Government guidelines was reduced to 500,000 with effect from 1 August 2009 on his appointment to the position of Group Chief Executive. 4. David McCarthy was appointed to the board on 3 March The remuneration disclosed is for the full year *Other remuneration includes amounts of 192,000 paid to Kevin Murphy up to June 2009 and 99,000 paid to Peter Fitzpatrick, each of whom opted for a taxable allowance in compensation for loss of pension. This compensation arises from the introduction of the pensions cap in the Finance Act 2006 and was determined on the basis of independent actuarial advice, reflecting their long service and the pension benefits being forfeited. The payment of the compensation was discontinued with effect from 30 June Also included is an amount of 2,928,000 in respect of Denis Casey and a negative 52,000 in respect of Peter Fitzpatrick which represent in each case the transfer value of the increase in accrued pension during the year including an allowance for the impact of early payment, based on past normal custom and practice. Aggregate remuneration for executive directors amounted to 11.1m (2008: 3.1m). This figure includes a share option grant expense of nil (2008: 0.1m), a long-term incentive plan expense of 0.1m negative (2008: 0.2m negative), normal pension contributions of 0.2m (2008: 0.3m) and additional pension contributions amounting to 7.3m. At the request of the trustees, these additional pension contributions were made to the relevant pension schemes to enable the pensions to be paid to the retiring individuals over their remaining lifetime. These contributions would have been due over the future service lives of the relevant executive directors but were brought forward, in line with standard practice, as a result of their early retirement. The cost of executive directors is allocated between the company and its principal subsidiaries based on duties carried out for those companies. Overview Business Review Corporate Governance Financial Statements 59

60 Directors Report on Remuneration (Audited) Executive Directors Remuneration and Pension Benefits (continued) The directors pension benefits under the various defined benefit pension schemes in which they are members are as follows: Transfer value of the Increase in accrued pension increase in accrued Total accrued during the year 1 pension 2 pension Denis Casey , Peter Fitzpatrick 4 (7) - (52) 24* ** Kevin Murphy 4 12 (26)*** 211 (382)* ** David McCarthy , ,220 1, Increases are after adjustment for inflation and reflect additional pensionable service and earnings. 2. The transfer value of the increase in accrued benefits represents the amounts that the pension scheme would transfer to another pension scheme, in relation to the benefits accrued during the year in the event of the member leaving service. *Spouses benefits are based on the non-capped pension. The transfer value of the increase includes the sum of (a) the effect of the change of the capped pension for the member, (b) the effect of the change of the spouses uncapped benefit and (c) the impact of early payment based on past normal custom and practice. 3. Total accumulated amounts of accrued benefits payable at normal retirement ages. **The accrued pension represents the capped pension with CPI increase. ***The level of cap selected was lower than the pension already accrued resulting in a negative increase during 2008 and thus a negative transfer value. 4. The accrued pensions for Peter Fitzpatrick and Kevin Murphy reflect the removal of the cap on pension accrual with an appropriate adjustment following the discontinuance of the compensation payments. 5. The increase in accrued pension and the associated increase in transfer value reflects adjustments to David McCarthy s salary on his appointment as Group Finance Director in February

61 Directors Report on Remuneration (Audited) Executive Directors Share Options As at 1 Lapsed Forfeited As at 31 Earliest Latest January during the during the Exercise December exercise exercise Scheme 2009 year year Price 2009 date date Kevin Murphy ,648 18, /06/ /06/ , ,912 28/03/ /03/ , ,418 27/06/ /06/ , ,930 18/04/ /04/ , ,864 08/04/ /04/ , ,620 08/10/ /10/ , ,182 04/03/ /03/ , ,926 David McCarthy ,821 12, /06/ /06/ , ,746 28/03/ /03/ , ,564 27/06/ /06/ , ,656 18/04/ /04/ , ,884 08/04/ /04/ , ,336 08/10/ /10/ , ,644 04/03/ /03/ , ,830 Denis Casey ,317-16, /06/ /06/ ,256-21, /03/ /03/ ,418-17, /06/ /06/ ,206-37, /04/ /04/ ,104-30, /04/ /04/ ,370-23, /10/ /10/ ,092-77, /03/ /03/ ,763 - Peter Fitzpatrick ,571-28, /03/ /03/ ,544-21, /06/ /06/ ,114-22, /04/ /04/ ,310-40, /04/ /04/ ,590-31, /10/ /10/ ,628-49, /03/ /03/ ,757 - The market price of the shares at 31 December 2009 was 3.30 (31 December 2008: 1.57) and the price range during 2009 was 0.63 to 5.90 (2008: 1.10 to 13.31). Executive directors and non-executive directors shareholdings in the company are detailed in Note 54 Related parties. Overview Business Review Corporate Governance Financial Statements 61

62 Directors Report on Remuneration (Audited) Long-term Incentive Plan Conditional shares awarded under the long-term incentive plan are as follows: Total as at 31 Granted in Granted in Granted in Lapsed in Forfeited in December Kevin Murphy 18,662 26,595 48,182 18,662-74,777 David McCarthy 15,398 16,914 30,644 15,398-47,558 Denis Casey 19,395 42,553 77, ,040 - Peter Fitzpatrick 26,066 27,393 49, ,087 - The fair value of conditional shares at the grant date in 2007 was and at 31 December 2009 was The fair value of conditional shares at the grant date in 2008 was 6.12 and at 31 December 2009 was Non-Executive Directors Remuneration Fees paid to non-executive directors are reviewed annually. The level of basic fees for non-executive directors was reduced by 25% to 56,250 with effect from 1 September Non-executive directors who perform additional services outside the normal duties of a director may receive additional fees. In particular Roy Keenan received additional fees as Senior Independent Director and as a member of the Audit and Risk Committee and Breffni Byrne received an additional fee as Chairman of the Audit and Risk Committee. The remuneration payable in respect of each non-executive director is as follows: Gillian Bowler Breffni Byrne David Byrne 2-75 Danuta Gray Margaret Hayes Eamonn Heffernan Roy Keenan Ray MacSharry Kieran McGowan 4-77 Liam O Reilly Pat Ryan Finbar Sheehan The Chairman s (Gillian Bowler) fee was reduced to 200,000 p.a. with effect from 1 January David Byrne retired from the board in May Ray MacSharry and Margaret Hayes joined the board in December Kieran McGowan retired from the board in October Liam O Reilly joined the board in September Pat Ryan joined the board in December In addition to board fees, in 2009 prior to his appointment as a director, Pat Ryan was paid 121,000 (inclusive of VAT) in respect of consultancy services to the bank s treasury operation from April to September Finbar Sheehan retired from the board in May 2009.

63 Financial Statements Statement of Directors' Responsibilities 64 Independent Auditors' Report 66 Consolidated Statement of Financial Position 68 Consolidated Income Statement 69 Consolidated Statement of Comprehensive Income 70 Consolidated Statement of Changes in Equity 71 Consolidated Statement of Cash Flows 73 Company Statement of Financial Position 75 Company Statement of Comprehensive Income 76 Company Statement of Changes in Equity 77 Company Statement of Cash Flows 79 Notes to the Group Financial Statements 81 Additional Information 209 Embedded Value Basis Supplementary Information 211 Overview Business Review Corporate Governance Financial Statements

64 Statement of Directors Responsibilities in respect of the Annual Report and the Financial Statements The directors are responsible for preparing the Annual Report and the consolidated and company financial statements, in accordance with applicable law and regulations. Company law requires the directors to prepare consolidated and company financial statements for each financial year. Under company law the directors are required to prepare the consolidated financial statements in accordance with IFRSs, as adopted by the European Union ( EU ), and have elected to prepare the company financial statements in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Acts, 1963 to In preparing the consolidated and company financial statements, the directors have also elected to comply with IFRSs issued by the International Accounting Standards Board ( IASB ). The consolidated and company financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the group and company. The Companies Acts, 1963 to 2009 provide in relation to such financial statements, that references in the relevant part of these Acts to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the consolidated and company financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state that the financial statements comply with IFRSs as adopted by the EU as applied in accordance with the Companies Act, 1963 to 2009 and IFRSs issued by the IASB; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business. Under applicable law and the requirements of the Listing Rules issued by the Irish Stock Exchange regulations, the directors are also responsible for preparing a Directors Report and reports relating to directors remuneration and corporate governance which comply with that law and those Rules. In particular, in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 (the Transparency Regulations ), the directors are required to include in their report a fair review of the business and a description of the principal risks and uncertainties facing the group and the company and a responsibility statement relating to these and other matters, included below. The directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that its financial statements comply with the Companies Acts, 1963 to 2009 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation. The directors are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company s website Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 64

65 Statement of Directors Responsibilities in respect of the Annual Report and the Financial Statements Responsibility Statement, in accordance with the Transparency Regulations Each of the directors, whose names and functions are listed on pages 42 to 43, confirm that, to the best of each person s knowledge and belief: the consolidated financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities and financial position of the group at 31 December 2009 and its (loss) for the year then ended; the company financial statements, prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the Companies Acts 1963 to 2009, give a true and fair view of the assets, liabilities and financial position of the company at 31 December 2009; and the directors report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that they face. On behalf of the Board Gillian Bowler Chairman David McCarthy Group Finance Director 23 March 2010 Kevin Murphy Group Chief Executive Ciarán Long Company Secretary Overview Business Review Corporate Governance Financial Statements 65

66 Independent Auditor s Report to the Members of Irish Life & Permanent plc We have audited the consolidated and company financial statements (the financial statements ) of Irish Life & Permanent plc for the which comprise the Consolidated and Company Statement of Financial Position, the Consolidated Income Statement, the Consolidated and Company Statement of Comprehensive Income, the Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Statement of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein. This report is made solely for the company s members, as a body, in accordance with section 193 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Independent Auditor The directors responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards ( IFRSs ) as adopted by the European Union are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view in accordance with IFRSs as adopted by the European Union and have been properly prepared in accordance with the Companies Acts 1963 to 2009 and, in the case of the consolidated financial statements, Article 4 of the IAS Regulation. We also report to you whether, in our opinion: proper books of account have been kept by the company; at the financial position date, there exists a financial situation requiring the convening of an extraordinary general meeting of the company; and the information given in the Directors Report is consistent with the financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit, and whether the Company Statement of Financial Position is in agreement with the books of account. We also report to you if, in our opinion, any information specified by law or the Listing Rules of the Irish Stock Exchange regarding directors remuneration and directors transactions is not disclosed and, where practicable, include such information in our report. We review whether the Corporate Governance Statement reflects the group s compliance with the nine provisions of the 2008 FRC Combined Code specified for our review by the Listing Rules of the Irish Stock Exchange, and we report if it does not. We are not required to consider whether the board s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only; the Directors Report, the Overview, including the Chairman s Statement and the Business Review. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. 66

67 Independent Auditor s Report to the Members of Irish Life & Permanent plc Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group s and company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group s affairs as at 31 December 2009 and of its (loss) for the year then ended; the company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Acts 1963 to 2009, of the state of the company s affairs as at 31 December 2009; the consolidated financial statements have been properly prepared in accordance with the Companies Acts 1963 to 2009 and Article 4 of the IAS Regulation; and the company financial statements have been properly prepared in accordance with the Companies Acts 1963 to We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the company. The Company Statement of Financial Position is in agreement with the books of account. In our opinion the information given in the Directors Report is consistent with the financial statements. The net assets of the company, as stated in the company statement of financial position are more than half of the amount of its called up share capital and, in our opinion, on that basis there did not exist at 31 December 2009 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company. Chartered Accountants Registered Auditor 1 Harbourmaster Place IFSC Dublin 1 23 March 2010 Overview Business Review Corporate Governance Financial Statements 67

68 Consolidated Statement of Financial Position as at 31 December 2009 Notes m m Assets Cash and balances with central banks Items in course of collection Debt securities 5, 9 15,780 10,929 Equity shares and units in unit trusts 6 13,510 10,390 Derivative assets 7 1,169 1,162 Loans and receivables to customers 8, 9 38,592 40,075 Loans and receivables to banks 10 4,925 4,775 Investment properties 11 1,769 2,280 Reinsurance assets 34 1,979 2,133 Prepayments and accrued income Interest in associated undertaking Property and equipment Shareholder value of in-force business Intangible assets Goodwill Current tax assets - 5 Other assets Deferred acquisition costs Retirement benefit asset Total assets 80,021 74,349 Liabilities Deposits by banks 20 18,713 18,546 Customer accounts 21 14,562 14,118 Debt securities in issue 22 13,262 10,899 Derivative liabilities Investment contract liabilities 23 24,032 21,118 Insurance contract liabilities 24 4,034 4,007 Outstanding insurance and investment claims Accruals Other liabilities 26(a) Provisions 26(b) Current tax liabilities 9 - Deferred front end fees Deferred tax liabilities Retirement benefit liability Subordinated liabilities 29 1,644 1,699 Total liabilities 78,015 72,001 Equity Share capital 30, Share premium Other reserves Retained earnings 30 1,695 1,999 Equity excluding non-controlling interest 2,006 2,347 Non-controlling interest 31-1 Total equity including non-controlling interest 2,006 2,348 Total liabilities and equity 80,021 74,349 On behalf of the Board 68 Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary

69 Consolidated Income Statement Notes m m Interest receivable 39 1,281 2,180 Interest payable 39 (918) (1,694) Fees and commission income Fees and commission expenses 40 (157) (130) Trading income 41 (4) 5 Premiums on insurance contracts Reinsurers share of premiums on insurance contracts (116) (228) Investment return 43 2,585 (7,741) Fees from investment contracts and fund management Change in shareholder value of in-force business 14 (57) 70 Total operating income / (expense) 3,625 (6,521) Claims on insurance contracts 44 (489) (466) Reinsurers share of claims on insurance contracts Change in insurance contract liabilities 24 (27) 3 Change in reinsurers share of insurance contract liabilities 24 (103) 231 Change in investment contract liabilities 23 (2,484) 7,656 Investment expenses 45 (35) (50) Administrative expenses 46 (518) (540) Depreciation and amortisation Property and equipment 13, 46 (30) (31) Intangible assets 15, 46 (20) (19) Impairment Property and equipment 13 (9) - Intangible assets 15 (2) - (3,557) 6,936 Impairment of goodwill 16 - (170) Total operating (expenses) / income (3,557) 6,766 Operating profit before provisions Provisions for impairment Loans and receivables 9 (376) (82) Debt securities 9 - (122) (376) (204) Operating (loss) / profit (308) 41 Share of (losses) / profits of associated undertaking / joint venture 12 (2) 22 (Loss) / profit before taxation (310) 63 Taxation 49 (3) (10) (Loss) / profit for the year (313) 53 Attributable to Owners of the parent (313) 49 Non-controlling interest - 4 (313) 53 Earnings per share Cent Cent Basic 50 (116.8) 18.3 Diluted 50 (116.8) 18.3 On behalf of the Board Gillian Bowler Chairman Kevin Murphy Group Chief Executive Overview Business Review Corporate Governance Financial Statements David McCarthy Group Finance Director Ciarán Long Company Secretary 69

70 Consolidated Statement of Comprehensive Income Notes m m (Loss) / profit for the year (313) 53 Other comprehensive income Revaluation of owner occupied property 30, 49 (97) (138) Currency translation adjustment reserve Gains / (losses) on hedged investment in foreign operations 7 2 (12) Gains / (losses) on unhedged investment in foreign operations 7 1 (3) (Losses) / gains on hedging of investment in foreign operations 7 (2) 12 30, 49 1 (3) Change in value of available-for-sale financial assets Change in fair value of AFS financial assets 42 4 Change in fair value of AFS financial assets prior to date of reclassification as loans and receivables 5 - (47) 5, 30, (43) Amortisation of AFS securities reclassified to loans and receivables 5, 30, Other comprehensive income (39) (175) Deferred tax on other comprehensive income 28, Other comprehensive income, net of tax (38) (139) Total comprehensive income for the year (351) (86) Attributable to Owners of the parent (351) (89) Non-controlling interest 31-3 Total comprehensive income for the year (351) (86) On behalf of the Board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary 70

71 Consolidated Statement of Changes in Equity 2009 Attributable to owners of the parent Available- translation based Other Non- non- Non- non- Share Share Revaluation for-sale adjustment payments capital Own share Distributable distributable controlling controlling controlling capital premium reserve reserve reserve reserve reserves reserve reserve reserve interest interest interest Total Total Currency Share- excluding including m m m m m m m m m m m m m As at 1 January (45) (3) 8 7 (86) 920 1,165 2, ,348 Loss for the year (313) - (313) - (313) Other comprehensive income (net of tax) Revaluation losses (net of tax) - - (89) (89) - (89) Change in currency translation adjustment reserve (net of tax) Change in value of available-forsale financial assets (net of tax) Amortisation of AFS securities reclassified to loans and receivables (net of tax) Total other comprehensive income - - (89) (38) - (38) Total comprehensive income for the year - - (89) (313) - (351) - (351) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Equity-settled transactions Change in own shares at cost Transfer between reserves (107) Acquisition of non-controlling interest (note 31) (1) (1) Balance as at 31 December (2) 9 7 (66) 703 1,058 2,006-2, Overview Business Review Corporate Governance Financial Statements

72 72 Consolidated Statement of Changes in Equity 2008 Attributable to owners of the parent Available- Non- Share Share Revaluation for-sale adjustment payments capital Own share Distributable distributable controlling controlling controlling Total Total Currency Share- translation based Other excluding non- Non- including non- capital premium reserve reserve reserve reserve reserves reserve reserve reserve interest interest interest m m m m m m m m m m m m m As at 1 January (15) (98) 1,077 1,170 2, ,643 Profit for the year Other comprehensive income (net of tax) Revaluation losses (net of tax) - - (105) (105) (1) (106) Change in currency translation adjustment reserve (net of tax) (3) (3) - (3) Change in value of available-forsale financial assets (net of tax) (38) (38) - (38) Amortisation of AFS securities reclassified to loans and receivables (net of tax) Total other comprehensive income - - (105) (30) (3) (138) (1) (139) Total comprehensive income for the year - - (105) (30) (3) (89) 3 (86) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of share capital Release of share option reserve (2) Change in own shares at cost Transfer between reserves - - (1) - - (1) (1) 9 (1) (5) Dividends (207) - (207) - (207) Acquisition of non-controlling interest (note 31) (15) (15) Balance as at 31 December (45) (3) 8 7 (86) 920 1,165 2, ,348 On behalf of the Board Gillian Bowler Kevin Murphy David McCarthy Ciarán Long Chairman Group Chief Executive Group Finance Director Company Secretary

73 Consolidated Statement of Cash Flows Cash flows from operating activities Notes m m (Loss) / profit before taxation for the year (310) 63 Adjusted for Depreciation and amortisation Impairment losses Loans and receivables Debt securities Impairment of property and equipment and intangible assets 13, Impairment of goodwill Amortisation of subordinated debt 8 - Profit on the sale of held-to-maturity portfolio 43 - (29) Fair value losses on investment properties ,430 Realised and unrealised (profits) / losses on financial assets excluding trading assets (2,345) 7,252 Profit on buy back of debt securities in issue 43 (8) - Interest on subordinated liabilities Equity-settled share-based payment expenses Share of results of associated undertaking / joint venture 12 2 (22) Proceeds on the disposal of held-to-maturity portfolio - 2,543 Change in investment contract liabilities due to unrealised movements (154) (27) (Increase) / decrease in operating assets Loans and receivables to banks 1,224 (2,380) Loans and receivables to customers 1,165 (1,044) Other financial assets (5,370) (2,155) Investment properties (6) (148) Reinsurance assets 154 (96) Shareholder value of in-force business 57 (70) Other assets (122) 44 Deferred acquisition costs 11 (8) Retirement benefit assets (7) (3) Increase / (decrease) in operating liabilities Deposits by banks (104) 9,190 Customer accounts (148) 1,488 Debt securities in issue 2,364 (7,821) Insurance contract liabilities 27 (3) Investment contract liabilities 3,068 (6,429) Payables related to direct insurance contracts 1 (23) Deferred front-end fees (15) (17) Derivative liabilities 120 (313) Other liabilities and accruals 50 (231) Retirement benefit liability 1 (4) Net cash flows from operating activities before tax 675 1,690 Tax refunded / (paid) 9 (38) Net cash flows from operating activities 684 1,652 Overview Business Review Corporate Governance Financial Statements 73

74 Consolidated Statement of Cash Flows Notes m m Cash flows from investing activities Purchase of property and equipment 13 (14) (33) Sale of property and equipment Purchase of intangible assets 15 (9) (15) Purchase of non-controlling interest in subsidiary undertaking (5) (52) Dividends received from associated undertaking Net cash flows from investing activities (11) (64) Cash flows from financing activities Issue of ordinary share capital - 10 Issue of new subordinated liabilities Redemption of subordinated liabilities - (160) Interest paid on subordinated liabilities (60) (81) Cash from redemption of debt securities in issue (57) - Equity dividends paid 51 - (207) Net cash flows from financing activities (117) (314) Increase in cash and cash equivalents 556 1,274 Analysis of changes in cash and cash equivalents Cash and cash equivalents as at 1 January 2,280 1,006 Net cash flow 556 1,274 Cash and cash equivalents as at 31 December ,836 2,280 74

75 Company Statement of Financial Position as at 31 December Notes m m Assets Cash and balances with central banks Items in course of collection Debt securities 5, 9 12,438 9,359 Derivative assets Loans and receivables to customers 8, 9 38,165 39,545 Loans and receivables to banks 10 2,600 1,988 Interest in subsidiary undertakings 12 2,855 2,855 Prepayments and accrued income Property and equipment Intangible assets Current tax assets - 8 Deferred tax asset Other assets Retirement benefit assets Total assets 56,874 54,590 Liabilities Deposits by banks 20 17,842 17,581 Customer accounts 21 20,830 19,552 Debt securities in issue 22 12,558 10,176 Derivative liabilities ,793 Accruals Other liabilities 26(a) Provisions 26(b) Current tax liabilities 1 - Retirement benefit liabilities Subordinated liabilities 29 1,432 1,492 Total liabilities 53,486 51,006 Equity Share capital 30, Share premium 30 2,833 2,833 Other reserves Retained earnings Total equity 3,388 3,584 Total liabilities and equity 56,874 54,590 On behalf of the Board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary Overview Business Review Corporate Governance Financial Statements 75

76 Company Statement of Comprehensive Income Notes m m Loss for the year (198) (39) Other comprehensive income Revaluation of owner occupied property 30, 49 (51) (47) Change in value of available-for-sale financial assets Change in fair value of AFS financial assets 42 4 Change in fair value of AFS financial assets prior to date of reclassification as loans and receivables 5 - (47) 5, 30, (43) Amortisation of AFS securities reclassified to loans and receivables 5, 30, Other comprehensive income 6 (81) Deferred tax on other comprehensive income 28, 49 (5) 22 Other comprehensive income, net of tax 1 (59) Total comprehensive income for the year (197) (98) On behalf of the Board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary 76

77 Company Statement of Changes in Equity 2009 Share- Available- based Other Share Share Revaluation for-sale payments capital Retained capital premium reserve reserve reserve reserves earnings Total m m m m m m m m As at 1 January 89 2, (45) ,584 Loss for the year (198) (198) Other comprehensive income (net of tax) Revaluation losses (net of tax) - - (49) (49) Change in value of available-for-sale financial assets (net of tax) Amortisation of AFS securities reclassified to loans and receivables (net of tax) Total other comprehensive income - - (49) Total comprehensive income for the year - - (49) (198) (197) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Equity-settled transactions Balance as at 31 December 89 2, , Overview Business Review Corporate Governance Financial Statements

78 78 Company Statement of Changes in Equity 2008 Share- Available- based Other Share Share Revaluation for-sale payments capital Retained capital premium reserve reserve reserve reserves earnings Total m m m m m m m m As at 1 January 88 2, (15) ,881 Loss for the year (39) (39) Other comprehensive income (net of tax) Revaluation losses (net of tax) - - (104) (29) Change in value of available-for-sale financial assets (net of tax) (38) (38) Amortisation of AFS securities reclassified to loans and receivables (net of tax) Total other comprehensive income - - (104) (30) (59) Total comprehensive income for the year - - (104) (30) (98) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of share capital Equity-settled transactions (2) - - (2) Release of share option reserve (1) Dividends (207) (207) Balance as at 31 December 89 2, (45) ,584 On behalf of the Board Gillian Bowler Kevin Murphy David McCarthy Ciarán Long Chairman Group Chief Executive Group Finance Director Company Secretary

79 Company Statement of Cash Flows Notes m m Cash flows from operating activities Loss before taxation for the year (220) (50) Adjusted for Depreciation and amortisation 13, Impairment losses Loans and receivables Debt securities Impairment of property and equipment Impairment of goodwill Amortisation of subordinated debt 8 - Profit on the sale of held-to-maturity portfolio 5 - (29) Fair value losses on investment properties 11-1 Dealing profits (10) (5) Interest on subordinated liabilities Dividends from subsidiaries (42) (121) Proceeds on the disposal of held-to-maturity portfolio - 2,543 (Increase) / decrease in operating assets Loans and receivables to banks 767 (1,463) Loans and receivables to customers 1,115 (1,492) Other financial assets (2,908) (3,288) Other assets (1,617) 309 Retirement benefit assets (5) - Increase / (decrease) in operating liabilities Deposits by banks (10) 8,728 Customer accounts 687 3,291 Debt securities in issue 2,400 (7,231) Other liabilities 16 (154) Retirement benefit liabilities - (5) Net cash flows from operating activities before tax 531 1,462 Tax refunded / (paid) 9 (16) Net cash flows from operating activities 540 1,446 Overview Business Review Corporate Governance Financial Statements 79

80 Company Statement of Cash Flows Notes m m Cash flows from investing activities Purchase of property and equipment 13 (7) (14) Sale of property and equipment Purchase of intangible assets 15 (1) (5) Dividends received from subsidiaries Net cash flows from investing activities Cash flows from financing activities Issue of ordinary share capital - 10 Issue of new subordinated liabilities Redemption of subordinated liabilities - (160) Interest paid on subordinated liabilities (53) (69) Equity dividends paid 51 - (207) Net cash flows from financing activities (53) (302) Increase in cash and cash equivalents 521 1,337 Analysis of changes in cash and cash equivalents Cash and cash equivalents as at 1 January 2, Net cash flow 521 1,337 Cash and cash equivalents as at 31 December ,718 2,197 80

81 Notes to the Group Financial Statements 1 Basis of preparation and significant accounting policies 82 2 Critical accounting judgements and estimates 95 3 Segmental information 97 4 Cash and cash equivalents Debt securities Equity shares and units in unit trusts Derivative instruments Loans and receivables to customers Provision for impairment Loans and receivables to banks Investment properties Interest in subsidiaries and associated undertakings Property and equipment Shareholder value of in-force business Intangible assets Goodwill Other assets Deferred acquisition costs Retirement benefit obligations Deposits by banks Customer accounts Debt securities in issue Investment contract liabilities Life insurance contracts Financial options and guarantees Other liabilities and provisions Deferred front-end fees Deferred taxation Subordinated liabilities Shareholders' equity Non-controlling interest Authorised and issued share capital Analysis of equity and capital Financial risk management Fair value of financial instruments Measurement basis of financial assets and liabilities Current / non-current assets and liabilities Assets held in unit-linked funds Net interest income Net fees and commission expenses Trading income Premiums on insurance contracts Investment return Claims on insurance contracts Investment expenses Administrative and other expenses Employment costs Share-based payments Taxation Earnings per share Dividends Commitments and contingencies Principal subsidiary and associated undertakings Related parties Reporting currency and exchange rates Events after reporting period 208 Overview Business Review Corporate Governance Financial Statements 81

82 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies Introduction Irish Life & Permanent plc is a parent company domiciled in Ireland. The consolidated financial statements for the consolidate the individual financial statements ("the financial statements") of the company and its subsidiaries (together referred to as the group ) and show the group s interest in associates using the equity method of accounting. There has been no change arising from the reorganisation of the group structure. This structure is set out Note 56 Events after reporting period. The individual and consolidated financial statements of the company were authorised for issue by the directors on 23 March The accounting policies applied in the preparation of the financial statements for the are set out below. Basis of preparation As required by European Union (EU) law from 1 January 2005, the consolidated financial statements have been prepared in accordance with International Financial Accounting Standards ( IFRSs ) as adopted by the EU. The individual financial statements of the company ( company financial statements ) have been prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the Companies Acts 1963 to 2009 which permits a company, that publishes its company and consolidated financial statements together, to take advantage of the exemption in Section 148(8) of the Companies Act 1963 from presenting to its members its company income statement and related notes. The 2009 statutory financial information has been prepared on a consistent basis with the annual report and financial statements for 2008 with the exception of the following items: - The presentation of segmental analysis has been amended to incorporate the requirements of "IFRS 8: Operating Segments", effective from 1 January 2009; - The presentation of the primary financial statements has been updated to reflect the requirements of "IAS 1: Presentation of Financial Statements (Amendment)", effective from 1 January 2009; and - The financial statements include enhanced disclosures as required by "IFRS 7: Financial Instruments: Disclosures (Amendment) - Improving disclosures about Financial Instruments with respect to fair value measurements and liquidity risk". IFRS 4 brings into force phase one of the International Accounting Standard Board's ("IASB") insurance accounting project. In view of the phased implementation of IFRS for insurance business, the group believes that shareholders will continue to place considerable reliance on embedded value information relating to the life assurance business. The statutory financial information includes insurance contracts written in the life assurance business based on embedded value earnings calculated using the EEV principles developed by the European Chief Financial Officers' (CFO) Forum. The EV basis supplementary information on pages 216 to 218 extends these principles to investment contracts written in the life assurance business. The financial information has been prepared on the going concern basis. Risk factors including credit, market, liquidity, insurance and operational risk impact on the group s activities. The current continued global financial crisis and the significantly deteriorated economic environment in which we operate places further pressure on the group as these risk factors are managed. The Board of Directors has reviewed these risk factors and all relevant information to assess the group s ability to continue as a going concern. This review included consideration of the impact of the current economic and political factors affecting the group and the industry, the capital position of the regulated entities in the group, the liquidity position and the access to funds for the banking entities (including the ability to use assets as collateral to raise funds). The directors have reviewed the group s business plan for 2010 to 2012 which incorporates its funding and capital plan and considered the critical assumptions underpinning this plan and tested them under stressed scenarios. The directors have also taken into account measures introduced by the Irish Government to improve liquidity, including the Government Guarantee, introduced by the Irish Government in September 2008, and the Credit Institutions Eligible Liabilities Guarantee Scheme (the "ELG Scheme") introduced by the Government in December In concluding on the going concern basis the directors took into account the Government Guarantee, the ELG scheme the ability to use assets as collateral to raise funds and the Government s acknowledgment of the group s importance to the economy as a whole. As a result the directors are satisfied that the group s financial information continues to be prepared on a going concern basis as it will have access to sufficient funding and resources to continue in business for the foreseeable future. 82 The IFRSs adopted by the EU applied by the company and group in the preparation of these financial statements are those that were effective for accounting periods ending on or before 31 December 2009.

83 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Standards and interpretations which are effective from 1 January 2009 and have been adopted for the first time in the current reporting period are detailed below: Title IAS 1: Presentation of Financial Statements (Amendment) IFRS 8: Operating Segments IAS 32: Financial Instruments: Presentation (Amendment) IAS 23: Borrowings Costs (Amendment) IFRS 2: Share-Based Payment: Vesting Conditions and Cancellations (Amendment) IFRIC 16: Hedges of Net Investment in a Foreign Operation IFRS 7: Financial Instruments : Disclosures (Amendment) - Improving Disclosures about Financial Instruments IAS 40: Investment Property (Amendment) IAS 38: Intangible Assets (Amendment) IFRIC 18: Transfers of Assets from Customers IFRIC 9: Reassessment of Embedded Derivatives and IAS 39: Financial Instruments: Recognition and Measurement (Amendment) Impact on company and consolidated financial statements The group has elected to present two performance statements (an income statement and a statement of comprehensive income) in compliance with the revised standard. Changes to terminology and increased disclosure requirements have also been reflected in the consolidated financial statements of the group. This standard requires that the identification of reportable segments be determined by reference to the internal reporting structure of the company. Consequently, two new reporting segments have been identified and included in the consolidated financial statements. Prior period comparatives have been restated to reflect this revised presentation. This amendment allows puttable financial instruments and obligations which arise on liquidation to be classified as equity only if they meet specific criteria detailed in the standard. This amendment did not have a material impact on the consolidated financial statements of the group. This amendment requires that borrowing costs related to assets that take a substantial period of time to get ready for use or resale should be capitalised as part of the cost of the assets. This amendment did not have a material impact on the consolidated financial statements of the group. This amendment provides clarification on the accounting treatment of cancellations and vesting conditions. This amendment did not have a material impact on the consolidated financial statements of the group. IFRIC 16 addresses the application of hedge accounting to foreign exchange differences between the functional currency of a foreign operation and the functional currency of its parent. This IFRIC did not have a material impact on the consolidated financial statements of the group. This amendment to IFRS 7 requires enhanced disclosures with respect to fair value measurements and liquidity risk. The group has elected to avail of the transitional relief offered in the amendments thereby deciding not to provide comparative information in the current year. IAS 40: Investment property has been amended to include investment property in the course of construction within its scope. It requires that if the company adopts the fair value model, investment property under construction should be measured at fair value with changes in fair value recognised in the income statement. This amendment did not have a material impact on the consolidated financial statements of the group. IAS 38: Intangible Assets has been amended to state that an entity may recognise a prepayment asset for advertising or promotional expenditure up to the point at which the entity has the right to access the goods purchased or up to the point of receipt of services. This amendment did not have a material impact on the consolidated financial statements of the group. This interpretation advises on the appropriate accounting treatment for transfers of property, plant and equipment received from 'customers' and concludes that when an item of property, plant and equipment transferred meets the definition of an asset from the perspective of the recipient, the recipient should recognise the asset at its fair value on the date of transfer with the credit recognised as revenue in accordance with IAS 18: Revenue. This IFRIC did not have a material impact on the consolidated financial statements of the group. This amendment includes guidance on whether an embedded derivative should be separated from a host contract when a hybrid financial asset has been reclassed out of the 'fair value through profit or loss' category as permitted by the amendments to IAS 39: Financial Instruments: Recognition and Measurement effected in October This amendment is not expected to have a material impact on the consolidated financial statements of the group. 83 Overview Business Review Corporate Governance Financial Statements

84 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) The following table provides a brief outline of the likely impact on future financial statements of relevant IFRSs which are issued by the IASB and endorsed by the EU but are not yet effective and have not been early adopted in these financial statements. Standards and interpretations effective for annual periods beginning on or after 1 July 2009 Title Impact on company and consolidated financial statements IFRS 3: Business Combinations (Revised) The revisions to this standard addresses partial and step-up acquisitions costs associated with acquisitions, contingent consideration (measurement and recognition) and transactions with non-controlling interests. These amendments are not expected to have a material impact on the consolidated financial statements of the group. IAS 27: Consolidated and Separate Financial Statements (Amendment) The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group. IAS 28: Investments in Associates (Amendment) The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group. IAS 31: Interests in Joint Ventures (Amendment) The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group. IAS 38: Intangible Assets (Amendment) The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group. IAS 39: Financial Instruments: Recognition and Measurement (Amendment) This amendment includes guidance on how existing principles on hedge accounting should be applied. This amendment will not have a material impact on the consolidated financial statements of the group. IFRIC 17: Distributions of non-cash Assets to Owners This interpretation advises on the appropriate accounting treatment to be applied when an entity distributes assets other than cash dividends to its shareholders. This IFRIC is not currently expected to have a material impact on the consolidated financial statements of the group. 84

85 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Standards and interpretations effective for annual periods beginning on or after 1 January 2010 IFRS 2: Share-based Payment (Amendment) IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations (Amendment) IAS 1: Presentation of Financial Statements (Revised) IAS 7: Statement of Cash Flows (Amendment) IAS 17: Leases (Amendment) IAS 36: Impairment of Assets (Amendment) The amendments incorporate 'IFRIC 8: Scope of IFRS 2' and 'IFRIC 11: IFRS-Group and treasury share transactions' and expand on the guidance included in IFRIC 11 to address the classification of group arrangements which were not previously covered by that interpretation. These amendments are not expected to have a material impact on the consolidated financial statements of the group. This amendment clarifies that IFRS 5 specifies the disclosure requirements in respect of non-current assets classified as held for sale and discontinued operations. This amendment is not expected to have a material impact on the financial statements of the group. This revision clarifies that the potential settlement of a liability by the issue of equity will not affect its classification as current or non-current. This allows a liability to be classified as non-current (provided the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months following the accounting period). This amendment will not have a material impact on the consolidated financial statements of the group. The amendments specify that only expenditures that result in a recognised asset in the statement of financial position can be classified as investing activities in the statement of cash flows. This amendment will not have a material impact on the consolidated financial statements of the group. This amendment provides specific guidance on the classification of leases of land to make it consistent with general guidance on leases. In accordance with the general principles of IAS 17, leases should be classified as operating or finance leases. This amendment will not have a material impact on the consolidated financial statements of the group. This amendment clarifies that the largest cash generating unit (or group of units) to which goodwill should be allocated for impairment testing purposes is an operating segment as defined by IFRS 8: Operating segments (paragraph 5) before the aggregation of operating segments with similar economic characteristics allowed by paragraph 12 of IFRS 8. This amendment will not have a material impact on the consolidated financial statements of the group. Comparative amounts The comparative IFRS financial information for 2008 has been prepared on a consistent basis. Basis of measurement The consolidated and company financial statements are presented in millions of euro. They have been prepared on the historical cost basis except that the following assets and liabilities are stated at their fair values: derivative financial instruments; trading financial instruments and other financial instruments designated at fair value through profit or loss, certain risks in hedged financial instruments, financial assets classified as available for sale, investment properties and share-based payments on initial recognition. In addition, earnings of the life assurance in-force business are included on an embedded value ( EV ) basis. (i) Estimates and assumptions The preparation of financial statements in conformity with IFRSs as adopted by the EU, requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances and are reflected in the judgements made about the carrying amounts of assets and liabilities that are not objectively verifiable. Actual results may differ from the estimates made. The estimates and assumptions are reviewed on an ongoing basis and where necessary are revised to reflect current conditions. The principal estimates and assumptions made by management relate to insurance liabilities, investment valuations and investment contract liabilities, impairment of loans, interest rates, demographic and other factors. Judgements made by management that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 2 Critical accounting judgements and estimates. 85 Overview Business Review Corporate Governance Financial Statements

86 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) (ii) Accounting for subsidiaries Consolidated financial statements Subsidiaries are those entities (including special purpose entities and unit trusts) controlled by the group. Control exists when the group has the power, directly or indirectly, to govern the operating and financial policies of an entity in order to gain economic benefits. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Financial statements of subsidiaries are prepared up to the statement of financial position date. The result of subsidiaries acquired, other than the combination of Irish Permanent plc and Irish Life plc, are included in the consolidated income statement from the date of acquisition. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of gaining control. The combination of the businesses of Irish Life plc and Irish Permanent plc, which occurred in 1999, has been included in the consolidated financial statements using merger accounting rules whereby the assets and liabilities of the acquired entity were included at their previous carrying amounts as if the businesses had always been combined. The merger adjustment, which is the difference between the fair value of the shares issued to effect the merger and the nominal value of the shares acquired, is dealt with on consolidation through reserves. In accordance with S149 (5) of the Companies Act 1963, pre-acquisition profits of Irish Life plc are presented in accordance with merger accounting rules in retained earnings. All significant inter-company transactions and balances are eliminated on consolidation. The group has a controlling interest in an investment unit trust that is consolidated into the consolidated financial statements. The non-controlling interest liability is included in investment contract liabilities. Company financial statements Investments in subsidiaries are shown at cost less pre-acquisition dividends received prior to 1 January 2009 in the company financial statements unless they are impaired, in which case they are recorded at their recoverable amount. Investments in subsidiaries are assessed for impairment when dividends are received from the subsidiary in excess of the underlying subsidiary profit for that year. (iii) Interest in associates Associates are entities over which the group has significant influence but which it does not control. Consistent with IAS 28: Investment in Associates, it is presumed that the group has significant influence where it has between 20% and 50% of the voting rights in the entity. Interests in associates are accounted for on consolidation under the equity method. The investment in the associate is initially recorded at cost and increased or decreased each year by the group s share of the post acquisition profit or loss of the associate and other movements recognised directly in the equity of the associated undertaking. Goodwill arising on the acquisition of an associate is included in the carrying amount of the investment (net of any accumulated impairments). (iv) Interest in joint ventures A joint venture is an entity in which the group has joint control. Interests in joint ventures are accounted for on consolidation under the equity method. The investment in the joint venture is initially recorded at cost and increased or decreased each year by the group s share of the post acquisition profit or loss of the joint venture and other movements recognised directly in the equity of the joint venture. Goodwill arising on the acquisition of a joint venture is included in the carrying amount of the investment (net of any accumulated impairments). 86

87 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) (v) Foreign currencies Foreign currency transactions are translated into the functional currency of the entity at the exchange rate prevailing at the date of the transaction. Monetary and non-monetary assets and liabilities denominated in foreign currency are translated at the exchange rates prevailing at the balance sheet date. Exchange movements on these are recognised in the income statement. The results and financial position of group entities which have a functional currency different from euro are translated into euro as follows: - assets and liabilities, including goodwill and fair value adjustments, are translated at the rates of exchange ruling at the date of the statement of financial position; - income and expenses are translated at the average exchange rates for the period; and - all resulting exchange differences are recognised as a separate component of reserves called the currency translation adjustment reserve. On consolidation exchange differences arising from the translation of borrowings and currency instruments designated as hedges of the net investment in overseas subsidiaries are also taken to a separate component of other comprehensive income to the extent to which the hedge is deemed to be effective. The ineffective portion of any net investment hedge is recognised in the income statement immediately. On disposal or partial disposal of an overseas subsidiary, the appropriate portion of the separate component of other comprehensive income is included in the gain or loss on disposal. (vi) Investment properties Investment properties consist of land and buildings which are held for long-term rental yields and capital growth. Investment properties are carried at fair value with changes in fair value included in the income statement within the net investment return. Valuations are undertaken at least annually by external chartered surveyors at open market value in accordance with IAS 40: Investment Property and with guidance set down by their relevant professional bodies. (vii) Financial assets The group classifies its financial assets on initial recognition as held for trading ( HFT ), designated at fair value through profit and loss ( FVTPL ), available for sale ( AFS ), held to maturity ( HTM ) or loans and receivables. All derivatives are classified as HFT unless they have been designated as hedges. Purchases and sales of financial assets are recognised on the trade date, being the date on which the group commits to purchase or sell the asset. Financial assets are initially recorded at fair value. However, with the exception of assets classified as HFT or FVTPL, the initial fair value includes direct and incremental transaction costs. The fair value of assets traded on an active market is based on current bid prices. In the absence of current bid prices, the group establishes a fair value using various valuation techniques. These include recent transactions in similar items, discounted cash flow projections, option pricing models and other valuation techniques used by market participants. Financial assets are derecognised when the right to receive cash flows from the financial assets has expired or the group has transferred substantially all the risks and rewards of ownership. All assets attributable to life operations are carried at FVTPL to eliminate an inconsistency that would otherwise arise between the valuation of assets and liabilities. Debt securities Debt securities may be classified as HFT, FVTPL, AFS, or loans and receivables. In 2008, the group disposed of its HTM portfolio. The consequence of this disposal is that the HTM portfolio is tainted for a two-year period. Debt securities classified as HFT or FVTPL are measured at fair value and transaction costs are taken directly to the income statement. All debt securities held as part of the group s life assurance operations are classified as FVTPL. Realised and unrealised gains together with income earned on these assets are shown as investment return in the income statement. Overview Business Review Corporate Governance Financial Statements 87

88 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Where the group s banking operations holds debt securities as HFT, realised and unrealised gains together with interest are shown as trading income in the income statement. Debt securities classified as HTM, subsequent to initial recognition, are measured at amortised cost less any allowance for impairment. Income on these investments is recorded on an effective interest basis as interest receivable in the income statement. Impairment losses, where they arise and foreign exchange movements are reflected in the income statement. Debt securities classified as AFS, subsequent to initial recognition, are measured at fair value with unrealised gains and losses, other than currency translation differences, recognised in a separate reserve within other comprehensive income. Realised gains and losses, impairment losses and foreign exchange movements are reflected in the income statement. Income on debt securities classified as AFS is recognised on an effective interest basis and included as interest receivable in the income statement. In 2008, in compliance with the amendments to IAS 39 Financial Statements: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (October 2008) the group reclassified debt securities from the available for sale category to a loans and receivables category. The securities reclassified meet the qualifying criteria per the amendment to the standard and the group has the intention and the ability to hold these financial assets for the foreseeable future or until maturity. The impact of which is detailed in Note 5 Debt securities. Debt securities classified as loans and receivables, are measured at amortised cost, based on an effective interest rate which was determined at the date of reclassification. Equities and units in unit trusts Equities are classified as HFT or FVTPL. Realised and unrealised gains together with dividend income on equities are reported as net investment return in the income statement. Dividends are recognised in the income statement when the group s right to receive payment is established. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and that the group has no intention of trading. Loans and receivables, subsequent to initial recognition, are held at amortised cost less allowance for incurred impairment losses unless they are part of a fair value hedge relationship. Income is recognised on an effective interest basis as interest receivable in the income statement. Where loans and receivables are part of a fair value hedging relationship the accumulated change in the fair value resulting from the hedged risk is recognised together with the movements in the fair value of the related hedging instrument in the income statement. Cash and cash equivalents Cash and cash equivalents include liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. (viii) Impairment provisions The group assesses impairment of financial assets at each balance sheet date on a case by case basis for assets that are individually significant and collectively for assets that are not individually significant. Assets are impaired only if there is objective evidence that the result of one or more events that have occurred after the initial recognition of the asset have had an impact on the estimated future cash flows of the asset. For individual assets this includes changes in the payment status of the counterparty. Collective assessment groups together assets that share similar risk characteristics and applies a collective methodology based on existing risk conditions or events which have a strong correlation with a tendency to default. Potential impairment is calculated by comparing the present value of the estimated future cash flows (after taking account of the security held) discounted at the effective interest rate applicable to the asset with the carrying value in the statement of financial position. 88

89 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Where loans are impaired, the written down value of the impaired loan is compounded back to the net realisable balance over time using the original effective interest rate. This is reported through interest receivable within the income statement and represents the unwinding of the discount. A write-off is made when all or part of a loan is deemed uncollectible or forgiven. Write-offs are charged against previously established provisions for impairment or directly to the income statement. (ix) Derivative instruments Derivative instruments are used in both the group s banking and life assurance operations and primarily comprise currency forward rate contracts, currency and interest rate swaps, futures contracts, forward rate agreements and options. All derivatives are classified as HFT unless they have been designated as hedges. All derivatives are held on the statement of financial position at fair value. Fair values are obtained from quoted prices prevailing in active markets, where available. Otherwise, valuation techniques including discounted cash flow analysis and option pricing models are used to value the instruments. Gains and losses arising on derivatives held by life operations, which are measured at fair value, are recognised in investment return. Gains and losses arising from derivatives held for trading are recognised in trading income. Derivatives are used to hedge the group s banking operations. Where derivatives are used as hedges, formal documentation is drawn up at inception of the hedge specifying the hedging strategy, the component transactions and the methodology that will be used to measure effectiveness. Monitoring of hedge effectiveness is carried out on an on-going basis. All existing hedge relationships are fair value hedges. Movements in the fair value of derivative hedge positions together with the fair value movement in the hedged risk of the underlying financial instrument are reflected in the income statement. (x) Leases Lessee Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease period. Assets held as finance leases are capitalised and included in property and equipment at fair value. Lessor Assets leased to customers that transfer substantially all the risks and rewards incidental to ownership to the customer are classified as finance leases. They are recorded at an amount equal to the net investment in the lease, less any provisions for impaired rentals, within loans and receivables to customers. Leasing income is credited to interest income on an actuarial before-tax net investment basis to give a constant periodic rate of return. Assets leased to customers are classified as operating leases if the lease agreements do not transfer substantially all the risks and rewards of ownership. The leased assets are included as investment properties. Lease income is recognised on a straight-line basis over the term of the lease. (xi) Securitised assets The group has entered into funding arrangements to finance specific loans and receivables to customers. All such financial assets are held on the group statement of financial position and a liability recognised for the proceeds of the funding transactions. (xii) Financial liabilities Financial liabilities include deposits, debt securities issued, customer accounts and subordinated debt issued. Overview Business Review Corporate Governance Financial Statements Financial liabilities are carried at amortised cost calculated on an effective interest basis. 89

90 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Financial liabilities that are part of a hedging relationship are carried at amortised cost adjusted for changes in the fair value of the hedged risk. The change in the fair value of the hedged risk is recognised together with the movement in the fair value of the derivative positions hedging the liability in the income statement. Interest expense on an effective interest basis is recorded in the income statement as interest payable. (xiii) Product classifications In accordance with IFRS 4, the group s life assurance products are classified for accounting purposes as either insurance contracts or investment contracts at inception of the contract. Insurance contracts are contracts which transfer significant insurance risk. Contracts which do not transfer significant insurance risk are investment contracts. The group has a small closed book of insurance contracts which have a discretionary participating feature, all of these contracts also have significant insurance risk and are therefore classified as insurance contracts. (xiv) Insurance contract liabilities Insurance contract liabilities are determined by the appointed actuaries. The liabilities include statutory surpluses which have not been allocated to policyholders as well as an assessment of the cost of any future options and guarantees contained within the insurance contracts measured on a market consistent basis. Changes in the liabilities are included in the income statement. Statutory surpluses are determined by the appointed actuary following the annual investigations. The Board of Directors, acting upon the advice of the appointed actuaries, allocate a proportion of the statutory surplus to policyholders through an appropriation of declared bonuses. (xv) Liability adequacy tests The group performs liability adequacy tests on its insurance contract liabilities to ensure that the carrying amount of the liabilities is sufficient to cover estimated future cash flows. When performing the liability adequacy tests the group discounts all contractual cash flows and compares this amount to the carrying value of the liability. Any deficiency is immediately charged to the income statement. (xvi) Investment contract liabilities Investment contracts are measured at FVTPL to eliminate an inconsistency that would otherwise arise between the valuation of assets and liabilities. Unit-linked liabilities are valued with reference to the value of the underlying net asset value of the group s unitised investment funds at the balance sheet date. Non-linked investment contracts are measured based on the value of the liability to the policyholder at the balance sheet date. Deposits and withdrawals are accounted for directly in the statement of financial position as movements in the investment contract liabilities. (xvii) Reinsurance The group cedes insurance premiums and risk in the normal course of business in order to limit the potential for loss. Outward reinsurance premiums are accounted for in the same period as related premiums for the business being reinsured. Reinsurance assets include amounts due from reinsurance companies in respect of paid and unpaid losses and ceded future life and investment policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the consolidated statement of financial position. (xviii) Property and equipment Leasehold premises with initial lease terms of less than fifty years and all other equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated to write off the costs of such assets to their residual value over their estimated useful lives, which are assessed annually by the directors. Freehold premises and leasehold premises with initial lease terms in excess of fifty years are revalued annually by the directors and at least every five years by external valuers. The resulting increase in value is transferred to a revaluation reserve. The revalued premises, excluding the land element, are depreciated to their residual values over their estimated useful lives, which are assessed annually by the directors. 90

91 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Subsequent costs are included in the asset s carrying amount, only when it is probable that increased future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. Property and equipment is assessed for impairment where there is an indication of impairment. Where impairment exists, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement. The depreciation charge for the asset is then adjusted to reflect the asset s revised carrying amount. The estimated useful lives are as follows: Freehold buildings Leasehold buildings Office equipment Computer hardware Motor vehicles 50 years 50 years or term of lease if less than 50 years 5-15 years 3-10 years 5 years (xix) Goodwill The excess of the cost of a business combination over the interest in the net fair value of the identifiable assets, liabilities and contingent liabilities at the date of acquisition, of subsidiary undertakings, associated undertakings and other businesses, arising is capitalised as goodwill. Goodwill arising on the acquisition of shares in subsidiary and associated undertakings prior to 31 December 1996 was written off against reserves in the year of acquisition. Goodwill arising on acquisitions between 31 December 1996 and 1 January 2004 was recognised on the statement of financial position and amortised on a straight-line basis over its estimated useful life. The group has availed of the transitional arrangements under IFRS 1 and accordingly the unamortised goodwill at 1 January 2004 is recognised on the statement of financial position at deemed cost, and accumulated amortisation on goodwill arising before 1 January 2004 has not been reversed. From 1 January 2004 and arising subsequently, goodwill is carried on the statement of financial position at cost less any accumulated impairment losses. Goodwill is subject to an impairment review at least annually and if events or changes in circumstances indicate that the carrying amount may not be recoverable it is written down through the income statement by the amount of any impairment loss identified in the year. Goodwill arising on associates or joint ventures is shown as part of the investment in the associate or joint venture. (xx) Intangible assets Software Computer software is stated at cost, less amortisation and provision for impairment, if any. The external costs and identifiable internal costs of acquiring and developing software are capitalised where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Capitalised computer software is amortised over three to seven years. Software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset's carrying value is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. The estimated recoverable amount is the higher of the asset's fair value less costs to sell or value in use. Other intangible assets Other intangible assets relate to the client portfolio acquired on the acquisition of a brokerage company. Other intangible assets are amortised over twenty years. They are subject to an impairment review at least annually and if events or changes in circumstances indicate that the carrying amount may not be recoverable it is written down through the income statement by the amount of any impairment loss identified in the year. 91 Overview Business Review Corporate Governance Financial Statements

92 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) (xxi) Assets and liabilities classified as held for sale An asset or a disposal group is classified as held for sale if the following criteria are met: - its carrying value will be recovered principally through sale rather than continuing use; - it is available for immediate sale; and - the sale is highly probable within the next twelve months. When an asset (or disposal group) is initially classified as held for sale, it is measured at the lower of its carrying amount or fair value less costs to sell at the date of reclassification. Prior period amounts are not reclassified. Impairment losses subsequent to the classification of assets as held for sale are recognised in the income statement. Increases in the fair value less the costs to sale of assets classified as held for sale are recognised in the income statement to the extent that the increase is not in excess of any cumulative impairment loss previously recognised in respect of the asset. Where the above conditions cease to be met, the assets (or disposal group) are reclassified out of held for sale and included under the appropriate statement of financial positions classifications. (xxii) Shareholder value of in-force business As permitted under IFRS 4, insurance contracts are accounted for in accordance with embedded value methods, applying EEV principles and reflecting the provisions of FRS 27. The shareholder value of in-force business is the present value of future statutory surpluses attributable to shareholders expected to arise from the contracts which have been classified as insurance contracts. The shareholders interest in the value of the in-force business is included as an asset on the statement of financial position and the movement in this asset is reflected in the income statement. The value of in-force business calculated in accordance with EEV principles is determined by the group in consultation with independent actuaries. Assumptions regarding future rates of mortality, morbidity, persistency, taxation, investment returns and expense levels are based on the recent experience of the business, taking account of current economic conditions. The risk discount rate used to calculate the shareholder value of in-force business is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent allowance for the risk that experience in future years may differ from the assumptions. (xxiii) Retirement benefit obligations The group has both defined benefit and defined contribution schemes. The group s net obligation in respect of the defined benefit schemes is calculated separately for each scheme. The net obligation represents the present value of the obligation to employees in respect of service in the current or prior period less the fair value of the plan assets. The present value of the obligation is calculated annually by external actuaries using the projected unit method. The present value of the obligation is determined by discounting the estimated future cash flows. This discount rate is based on the market yield of high quality corporate bonds that have maturity dates approximating to the terms of the pension liability. Actuarial gains and losses up to 1 January 2004 have been taken directly to reserves. As permitted under IAS 19, the corridor approach has been adopted for actuarial gains and losses arising since that date. Under the corridor approach actuarial gains and losses are recognised only where the cumulative unrecognised actuarial gains or losses at the end of the previous reporting period exceed the greater of: - 10% of the present value of the defined benefit obligations at that opening statement of financial position date; or - 10% of the fair value of the scheme assets at that opening statement of financial position date. 92

93 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) The limits are applied separately to each scheme, with any resulting excess actuarial gains or losses recognised in the income statement over the expected remaining service lives of the active members of each scheme. The current and past service cost, the interest cost of the scheme liabilities and the expected return on scheme assets are recognised in the income statement in the period in which they are incurred. The group pays contractual contributions in respect of defined contribution plans. These contributions are recognised as employee expenses when the related employee service is received. (xxiv) Share-based payments The group operates a number of equity-settled share option schemes based on non-market vesting criteria. The group has availed of the transitional arrangements under IFRS 1 and no charge is included for share options granted before 7 November 2002 which had not vested by 1 January For all other options, the fair value of the options is determined at the date of grant and expensed in the income statement over the period during which the employees become unconditionally entitled to the options. The expense is credited to a separate equity reserve on the statement of financial position. At each period end the group revises its estimate of the number of shares that it expects to vest and any adjustment relating to current and past vesting periods is charged to the income statement. The group operates an equity-settled long-term incentive plan. The plan has grants under both market and nonmarket vesting criteria. The fair value of conditional shares granted is determined at the date of grant, the value determined with reference to market vesting criteria is expensed in the income statement over the period from the date of grant to vesting date, the value determined with reference to non-market vesting criteria is expensed in the income statement over the period during which the employees become unconditionally entitled to the shares. The expense is credited to a separate reserve in the statement of financial position. For the grant under non-market vesting criteria, at each period end the group revises its estimate of the number of options that it expects to vest and any adjustment relating to current and past vesting periods is charged to the income statement. (xxv) Termination payments Termination payments are recognised as an expense when the group is demonstrably committed to a formal plan to terminate employment before the normal retirement date. Termination payments for voluntary redundancies are recognised where an offer has been made by the group, it is probable that the offer will be accepted and the number of acceptances can be reliably estimated. (xxvi) Taxation Taxation comprises both current and deferred tax. Taxation is recognised in the income statement except where it relates to an item which is recognised directly in equity. Corporation tax payable is provided on taxable profits at current tax rates. Deferred tax is provided using the liability method on all temporary differences except those arising on goodwill not deductible for tax purposes, or where the temporary difference arose on the initial recognition of an asset or liability in a transaction which was not a business combination and which at the time of the transaction affects neither accounting profit nor taxable profit. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax liabilities and assets are offset only where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. (xxvii) Premium income and claims recognition on insurance contracts Premiums earned in respect of insurance contracts are accounted for in the same period in which the liabilities arising from those premiums are established. Claims are accounted for when paid or payable, or if earlier, on the date when the policy ceases to be included within the calculation of insurance contract liabilities. Overview Business Review Corporate Governance Financial Statements 93

94 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) (xxviii) Revenue from investment contracts Fees charged in respect of investment contracts are recognised when the service is provided. Initial fees, which exceed the level of recurring fees are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management services for institutional fund management are also recognised over the period of the service. Premiums and claims in respect of investment contracts are not included in the income statement but are reported as deposits to and withdrawals from investment contract liabilities in the statement of financial position. (xxix) Interest receivable and payable Revenue on assets classified as HTM and AFS as well as loans and deposits is recognised on an effective interest basis. This calculation takes into account interest received or paid, directly attributable fees and commissions and incremental transaction costs. The effective interest rate is the rate that discounts the expected future cash flows over the expected life of the instrument to the net carrying amount of the financial asset or liability at initial recognition. (xxx) Acquisition costs The costs directly associated with the acquisition of new investment management service contracts are deferred to the extent that they are expected to be recoverable out of future revenues to which they relate. Such costs are amortised through the income statement over the period in which the revenues on the related contracts are expected to be earned, at a rate commensurate with those revenues. Deferred acquisition costs are reviewed by category of business at the end of each financial year. Should the circumstances which justified the deferral of costs no longer apply, costs to the extent that they are believed to be irrecoverable are written off. For insurance contracts, acquisition costs to the extent that they are deferred are reflected within the shareholder value of in-force business. (xxxi) Other income and expense recognition Unless included in the effective interest calculation, fees and commissions receivable and payable are recognised on an accruals basis. Expenses are recognised on an accruals basis. (xxxii) Sales and repurchase agreements (including stock borrowing and lending) Financial assets may be lent for a fee or sold subject to a commitment to repurchase them. Such assets are retained on the statement of financial position when substantially all the risks and rewards of ownership remain with the group. The liability to the counterparty is included separately on the statement of financial position as appropriate. Similarly, where financial assets are purchased with a commitment to resell, or where the group borrows financial assets but does not acquire the risks and rewards of ownership, the transactions are treated as collateralised loans, and the financial assets are not included in the statement of financial position. The difference between the sale and repurchase price is recognised in the income statement over the life of the agreements using the effective interest rate. Fees earned on stock lending are recognised in the income statement over the term of the lending agreement. Securities lent to counterparties are also retained in the financial statements. (xxxiii) Dividends Final dividends on ordinary shares are recognised in equity in the period in which they are approved by the company s shareholders. Interim dividends are recognised in equity in the period in which they are paid. 94 (xxxiv) Purchases and sales of own shares As permitted under Irish legislation, a subsidiary of the group holds Irish Life & Permanent plc shares on behalf of life assurance policyholders. These shares are required to be treated as though they were purchased by the company for its own benefit and treated as treasury shares and therefore treated as a deduction in arriving at shareholders equity rather than as an asset.

95 Notes to the Group Financial Statements 1. Basis of preparation and significant accounting policies (continued) Under IFRS, the cost of the shares is required to be deducted from shareholders equity. However, as the shares are held on behalf of policyholders, the liability to the policyholder is carried at fair value. As a result shareholders equity is also reduced by the unrealised gain or loss on the shares reflected in the measurement of the liability, with changes in the unrealised gain and loss during the year resulting in a gain or loss in the income statement. Shares purchased and held by the employee benefit trust in anticipation of share awards that may vest under the long-term incentive plan are treated as treasury shares and therefore treated as a deduction in arriving at shareholders equity rather than an asset. (xxxv) Netting Assets, liabilities, income and expenses are shown net where there is a legal right to offset and there is an intention and an ability to settle on a net basis. 2. Critical accounting judgements and estimates Management discussed with the Audit Committee the development, selection and disclosure of the group s critical accounting policies and estimates and the application of these policies and estimates. Critical accounting judgements made by management in applying the group s accounting policies are set out below. Insurance and investment contracts Under IFRS, the group accounts for its insurance contracts using the embedded values, calculated based on the European Embedded Value Principles, and investment contracts are accounted for under IAS 39 and IAS 18. Insurance contracts are defined as those contracts which transfer significant insurance risk. Insurance risk is defined as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were not to occur. Investment contracts are those contracts which carry no significant insurance risk. Insurance contracts The group accounts for its insurance contracts using the embedded value basis of accounting which recognises the present value of in-force business (shareholder value of in-force business) as an asset. Policyholder liabilities for non-linked insurance contracts are estimated by management. This requires management to estimate future policyholder cash flows and to make assumptions regarding the probability and the timing of the occurrence of the insured event, future investment returns and future expenses. The liability will therefore vary with movements in interest rates and with changes in the actual cost of life assurance and annuity benefits where future mortality experience is uncertain. Management follows industry guidelines in setting assumptions, using standard insurance risk tables amended to reflect the group s own experience and, where appropriate, makes allowance for expected insurance risk improvements or disimprovements. Assumptions and sensitivities are set out in Note 24 Insurance contract liabilities. Reinsurance assets for non-linked insurance contracts require the group to estimate future cash flows from reinsurance contracts. The cash flows make assumptions regarding the probability and the timing of the occurrence of the reinsured event, future investment returns and future expenses. The asset will therefore vary with movements in interest rates and with future changes in actual experience. Management follows industry guidelines in setting assumptions using standard insurance risk tables amended to reflect the group s own experience and, where appropriate, makes allowance for expected insurance risk improvements or disimprovements. The shareholder value of in-force business is calculated by projecting future surpluses attributable to shareholders and discounting them to the balance sheet date. Future surpluses depend inter alia on insurance risk, lapse rates, future investment returns, expenses, reinsurance charges, product charges and taxation. Management estimates the future surpluses using industry standard methodologies having regard to both actual experience and current economic conditions. Surpluses are discounted at a risk,adjusted discount rate which is estimated by management based on current interest rates and an estimated risk margin. There is an acceptable range into which these assumptions can validly fall, and the use of different assumptions may cause the shareholder Overview Business Review Corporate Governance Financial Statements 95

96 Notes to the Group Financial Statements 2. Critical accounting judgements and estimates (continued) value of in-force business to differ from that assumed at the balance sheet date. This could significantly affect the income recognised and the value attributed to the in-force business in the financial statements. Assumptions and sensitivities are set out in Note 14 Shareholder value of in-force business. Investment contracts Investment contracts are accounted for as financial instruments under IAS 39 and IAS 18. These are primarily unit-linked contracts whose value is contractually linked to the fair value of the financial assets within the group s unitised investment funds. Initial fees earned and incremental costs (mainly commission) paid on sale of an investment contract are deferred and recognised over the expected life of the contract. The expected life of the contracts is estimated based on current experience and the term of the contracts and is reviewed at least annually. Changes to the expected life could affect the income and cost recognised and the value of the asset and liability in the accounts. However, given that any changes to expected life will affect both costs and fees, the net impact is unlikely to be significant. Impairment losses Management reviews the group s loan portfolios to assess impairment at least quarterly. Impairment loss calculations involve the estimation of future cash flows of loans and advances based on observable data at the statement of financial position date and historical loss experience for assets with similar credit risk characteristics. These calculations are undertaken on either a portfolio basis or separately for individually significant exposures. In applying the portfolio basis the group makes use of various modelling techniques which are specific to different portfolio types. Significant judgement is applied in use of various modelling techniques which are specific to different portfolio types. Significant judgement is applied in selecting and updating these models. In calculating individual impairment provisions the group takes account of a number of relevant considerations including historical experience, future prospects of the customer and value of collateral held. Significant judgement is applied in estimating the impact of these considerations on the expected future cash flows which relies heavily on the individual case circumstances and available information, including the date of the most recent professional valuation, the value of similar property recently sold, geographically adjacent property disposals, similar case experience and expert judgement. Where there has been a passage of time since a valuation has been obtained either an up to date valuation is obtained or an appropriate discount is applied. Financial instruments The group carries certain financial assets and liabilities at fair value, including all derivatives as well as assets and liabilities of the life assurance operations. Assets and liabilities are priced using a quoted market price where there is an active market for the instrument or by using a valuation model. Valuation models use data such as interest rate yield curves, equity prices, option volatilities and currency rates. Most of these parameters are directly observable from the market. Changes in the fair value of financial assets of the life assurance operations will largely be offset by corresponding changes in the fair value of liabilities and therefore the net impact on equity is unlikely to be significant. Interest receivable and payable Revenue on assets classified as HTM, AFS or FVTPL as well as on loans and deposits is recognised on an effective interest basis. This calculation takes into account interest received or paid, fees and commissions attributable to the asset or liability and incremental transaction costs. The effective interest rate is the rate that discounts the expected future cash flows over the expected life of the instrument to the net carrying amount of the financial asset or liability at initial recognition. The expected life is calculated based on current experience. Changes to the expected life could affect the income recognised and the value of the asset in the financial statements. Retirement benefit obligations The group operates a number of defined benefit and defined contribution pension schemes. For defined contribution schemes, the pension cost recognised in the income statement represents the contributions payable to the scheme. For defined benefit schemes, actuarial valuation of each of the scheme s obligations using the projected 96

97 Notes to the Group Financial Statements 2. Critical accounting judgements and estimates (continued) unit method and the fair valuation of each of the scheme s assets are performed annually in accordance with the requirements of IAS 19. The actuarial valuation is dependent upon a series of assumptions, the key ones being discount rates, expected rate of return on plan assets, salary increases, pension increases, rate of price inflation and mortality rates. The discount rate used to calculate the defined benefit scheme liabilities is based on the market yield at the Statement of Financial Position date of high-quality bonds with a similar duration to that of the schemes liabilities. The returns on Irish and overseas equities are set relative to fixed-interest returns by considering the long-term expected equity risk premium. The price inflation assumption reflects long-term expectations of both earnings and retail price inflation. Mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the group s own experience. The impact on the consolidated income statement and the consolidated statement of financial position could be materially different if a different set of assumptions were used. The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the statement of financial position date, adjusted for any historic unrecognised actuarial gains or losses, is recognised as a liability in the statement of financial position. An asset arising, for example, as a result of past overfunding or the performance of the plan investments, is recognised to the extent that it does not exceed the present value of future contribution holidays or refunds of contributions. To the extent that any unrecognised gains or losses at the start of the measurement year in relation to any individual defined benefit scheme exceed 10% of the greater of the fair value of the scheme assets and the defined benefit obligation for that scheme, a proportion of the excess is recognised in the income statement. Further information on retirement benefit obligations, including assumptions, is set out in Note 19 Retirement benefit obligations. 3. Segmental information Segmental information is presented in respect of the group s business segments. The presentation of segmental information has been revised in line with the update to IFRS 8 "Operating Segments" which is applicable for periods beginning on or after 1 January The December 2008 segmental information has been reclassified accordingly to incorporate the new segments identified under the new requirements of the standard. Historically, segmental information was presented in respect of the following main business segments: Banking Insurance and investment General insurance Other Retail banking services including current accounts, residential mortgages and other loans. Includes individual and group life assurance and investment contracts, pensions and annuity business written in Irish Life Assurance plc and Irish Life International Limited and the investment management business written in Irish Life Investment Managers Limited. Property and casualty insurance carried out through the group s associate company Allianz-Irish Life Holdings plc. This includes a number of small business units including third party life assurance administration, insurance brokerage and unallocated corporate costs. Overview Business Review Corporate Governance Financial Statements 97

98 Notes to the Group Financial Statements 3. Segmental information (continued) The revised segmental information is determined based on internal reporting provided to the Strategy Group, the chief operating decision maker ("CODM") of the group. All the members of the Strategy Group are members of key management personnel as described in Note 54 Related parties. The members include the Group Chief Executive of Irish Life & Permanent plc, the Group Finance Director, the Chief Executive of permanent tsb, the Chief Executive of Irish Life Investment Managers, the Chief Executive of Irish Life Retail, the Chief Executive of Irish Life Corporate Business, the Group Head of Risk and Compliance and the Group Head of Human Resources and Organisation Development. The Strategy Group is responsible for implementing the strategic management of the group as guided by the board. The Strategy Group reviews key performance indicators and internal management reports on a monthly and on a quarterly basis. The accounting policies of the segments are the same as for the group as a whole. Transactions between the reportable segments are on normal commercial terms and conditions. Revenue from external parties is measured in a manner consistent with that in the income statement. The primary performance measure utilised by the Strategy Group for the Banking Ireland and UK reportable segments is net interest receivable. The group is not reliant on revenue from transactions with a single external customer in the current or prior year reporting period. The group is organised into six reportable segments. Management identifies its reportable operating segments by service line, consistent with the reports used by the Strategy Group. The reporting segments represent the revenues generated from the group's products and services. The group's products and services have been aligned with the relevant reporting segments. These segments and their respective operations are as follows: Banking - Ireland Banking - UK Life assurance Fund management General insurance Brokerage and third-party administration Retail banking services including current accounts, residential mortgages and other loans to the Irish market. Retail banking services including residential mortgages and lending services to the UK market. Includes individual and group life assurance and investment contracts, pensions and annuity business written in Irish Life Assurance plc and Irish Life International Limited. Investment management services business provided to corporate, pension and charity clients and internally to Irish Life Assurance plc written in Irish Life Investment Managers Limited. Property and casualty insurance carried out through the group s associate company Allianz-Irish Life Holdings plc. This includes a number of small business units including third-party life assurance administration and insurance brokerage. 98

99 Notes to the Group Financial Statements 3. Segmental information (continued) The segmental results which relate to continuing activities are as follows: 2009 Reconciliations / Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration 1 adjustments 2 Total m m m m m m m m Net interest receivable - external (18) inter-segment 204 (210) (18) Other non-interest expenses - external 11 1 (119) (84) - inter-segment - - (17) Premiums on insurance contracts, net of reinsurance Investment return - external 8-2, ,593 - inter-segment (39) (8) Fees from investment contracts and fund management - external inter-segment (32) - Change in shareholder value of in-force business - - (57) (57) Total operating income / (expense) , (47) 3,625 Claims on insurance contracts, net of reinsurance - - (329) (329) Change in insurance / investment contract liabilities - - (2,614) (2,614) Investment expenses - - (67) (35) Administrative expenses (255) (10) (160) (24) - (44) (25) (518) Depreciation and amortisation (21) (1) (23) (1) - (4) - (50) Impairment (2) - (5) - - (4) - (11) Total operating (expenses) / income (278) (11) (3,198) (25) - (52) 7 (3,557) Operating profit / (loss) before provisions (15) 13-4 (40) 68 Loans and receivables (343) (33) (376) Total provisions for impairment (343) (33) (376) Operating (loss) / profit (266) (4) (15) 13-4 (40) (308) Share of losses of associated undertaking (2) - - (2) Taxation 23 1 (27) (2) - (1) 3 (3) (Loss) / profit for the year (243) (3) (42) 11 (2) 3 (37) (313) Overview Business Review Corporate Governance Financial Statements 99

100 Notes to the Group Financial Statements 3. Segmental information (continued) 2008 Reconciliations / Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration 1 adjustments 2 Total m m m m m m m m Net interest receivable - external (27) inter-segment 373 (412) (24) Other non-interest expenses - external 40 - (113) (49) - inter-segment (1) - (24) Premiums on insurance contracts, net of reinsurance Investment return - external 29 - (7,761) (7,732) - inter-segment (77) (9) Fees from investment contracts and fund management - external inter-segment (36) - Change in shareholder value of in-force business Total operating income / (expense) (7,130) (51) (6,521) Claims on insurance contracts, net of reinsurance - - (314) (314) Change in insurance / investment contract liabilities - - 7, ,890 Investment expenses - - (86) (50) Administrative expenses (268) (17) (166) (28) - (49) (12) (540) Depreciation and amortisation (21) (1) (24) (1) - (3) - (50) (289) (18) 7,300 (29) - (52) 24 6,936 Impairment of goodwill (170) (170) Total operating (expenses) / income (459) (18) 7,300 (29) - (52) 24 6,766 Operating profit / (loss) before provisions (27) 245 Loans and receivables (67) (15) (82) Debt securities (122) (122) Total provisions for impairment (189) (15) (204) Operating (loss) / profit (152) (27) 41 Share of (losses) / profits of associated undertaking / joint venture (1) Taxation 7 (3) (10) (3) - (3) 2 (10) (Loss) / profit for the year (146) (25)

101 Notes to the Group Financial Statements 3. Segmental information (continued) 2009 Reconciliations / Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration 1 adjustments 2 Total m m m m m m m m Assets Interest in associate Other assets 48,522 13,035 31, (13,413) 79,899 Total assets 48,522 13,035 31, (13,413) 80,021 Liabilities 47,927 12,987 30, (13,392) 78,015 Equity attributable to owners , (21) 2,006 Capital expenditure Reconciliations / Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration 1 adjustments 2 Total m m m m m m m m Assets Interest in associate Other assets 45,136 13,863 28, (13,628) 74,210 Total assets 45,136 13,863 28, (13,628) 74,349 Liabilities 44,316 13,818 27, (13,617) 72,001 Total equity , (11) 2,348 Equity attributable to non-controlling interest (1) - (1) Equity attributable to owners , (11) 2,347 Capital expenditure Brokerage and third-party administration 1 - Brokerage and third party administration services include 8m (2008: 14m) profit in respect of the insurance brokerage company and 5m loss (2008: 4m profit) in respect of the third party administration company. In 2009, the profit of the insurance brokerage company exceeded 10% of the cumulative profits earned by the group reporting segments. This company has not exceeded any of the other criteria specified in the segmental accounting standard and this experience is not expected to be repeated in subsequent reporting periods. Overview Business Review Corporate Governance Financial Statements 101

102 Notes to the Group Financial Statements 3. Segmental information (continued) Reconciliations / eliminations / consolidation adjustments 2 - In 2009, the negative return of 37m (2008: negative 25m) includes the following: (a) 8m negative investment return (2008: negative 9m) arising on the consolidation of the movement in the value of properties financed by non recourse inter-group loans. This brings the balance per the statement of financial position to 17m (2008: 9m). (b) 2m (2008: negative 2m) arises due to the different accounting treatment between the bank and the life company. The bank carried the liabilities at amortised cost; however, the corresponding assets in the life company are carried at FVTPL. This brings the balance per the statement of financial position to 4m (2008: 2m). (c) Corporate costs of 27m (2008: 14m), net of tax accounts for the remainder. These costs relate to group functions and are included here as they are not directly attributable to any business unit and hence are unallocated amounts. - Included in reconciliations / eliminations /consolidation adjustments are eliminations of 12bln (2008: 13bln) in respect of the statement of financial position. These adjustments relate to the elimination of floating-rate notes issued by special purpose vehicles between the Banking Ireland and Banking UK reporting segments but held within the group. The remainder of 2bln (2008: 1bln) relates to the elimination of inter-group balances between the bank and other group entities. - Reconciliations / eliminations / consolidation adjustments include inter-segmental interest receivable and payable on deposits and together with inter-segmental commission payments and receipts. - Elimination of inter-group rental expenses are also included. 4. Cash and cash equivalents Group Company m m m m Cash and balances at central banks Items in the course of collection Loans and receivables to banks (note 10) 2,510 1,956 2,510 1,951 2,836 2,280 2,718 2, Debt securities Group Company m m m m Available for sale 5,856 1,342 5,856 1,313 Loans and receivables 1,570 1,970 6,601 8,168 Designated at FVTPL 8,373 7, Gross debt securities 15,799 11,051 12,457 9,481 Less provision (19) (122) (19) (122) Net debt securities 15,780 10,929 12,438 9,359 Debt securities exclude 90m (2008: 144m) issued by Irish Life & Permanent plc and held by Irish Life Assurance plc which have been eliminated on consolidation. 102

103 Notes to the Group Financial Statements 5. Debt securities (continued) Debt securities, representing a mix of government gilts and high-rated corporate bonds, with a carrying value of 6.1bln (2008: 2.3bln) have been pledged to third parties in sale and repurchase agreements (Note 20 Deposits by banks). In February 2008, the group disposed of its held-to-maturity portfolio ("HTM"). This gave rise to a realised gain of 29m which was recognised as part of investment return. The fair value of this portfolio at 31 December 2007 was 2,493m. Cash flows arising from this disposal in 2008 were included within operating activities on the cash flow statement reflecting that the held-to-maturity portfolio formed part of the group s banking operations assets portfolio and the proceeds were reinvested in debt securities classified above as either "Available for sale" or "Loans and receivables" which also form part of the banking operations asset portfolio. The consequence of this disposal is that the HTM portfolio is tainted for a two-year period. During the year ended 31 December 2008 the group availed of the amendment to IAS 39 and IFRS 7 issued in October 2008, effective 1 July 2008, which permitted financial assets classified as available for sale ("AFS") that would have met the definition of loans and receivables, had they not been designated as available for sale, to be reclassified out of the available for sale category to the loans and receivables category as the group has the intention and ability to hold the financial assets for the foreseeable future or until maturity. No items were reclassified during the current accounting period. The table below sets out the financial assets reclassified and their carrying and fair values: Carrying value Fair value m m m m Available for sale debt securities reclassified to loans and receivables 1,570 1,970 1,542 1,756 The movement in the carrying value of debt securities classified as loans and receivables is included in subsequent tables within this note for both the current and prior year reporting periods. The table below sets out the amounts actually recognised in the income statement and other comprehensive income in respect of assets reclassified out of available for sale debt securities into loans and receivables: Income statement Other comprehensive income m m m m Period before reclassification Interest income Net change in fair value (47) Period after reclassification Interest income Amortisation (15) (9) 15 9 Total for period after reclassification The table below sets out the amounts that would have been recognised in the year following reclassification if the reclassification had not been made: Income statement Other comprehensive income m m m m Interest income Fair value movement (214) Overview Business Review Corporate Governance Financial Statements At the date of reclassification, the effective interest rates on reclassified available-for-sale investment securities ranged from 1.5% to 5% with expected recoverable cash flows of 2,098m. 103

104 Notes to the Group Financial Statements 5. Debt securities (continued) The group has not reclassified any debt securities from available for sale to loans and receivables during the current year. The impairment provision is analysed in Note 9 Provision for impairment. The carrying value of debt securities is analysed as follows: Group Company m m m m Government bonds 10,337 6,406 3, Bonds issued by public boards Bonds issued by credit institutions 4,336 4,147 3,143 2,730 Bonds issued by subsidiary companies - - 5,041 6,198 Other bonds 1, ,780 10,929 12,438 9,359 Listed 15,342 10,222 12,438 9,359 Unlisted ,780 10,929 12,438 9,359 The movement in held-to-maturity, available-for-sale and loans and receivables securities may be classified as follows: Group 2009 Available for Loans and sale receivables m m As at 1 January 1,342 1,970 Exchange differences on monetary assets (2) (5) Revaluation 42 - Additions 4,797 - Maturities / disposals (329) (416) Effective interest 6 6 Amortisation to statement of comprehensive income - 15 As at 31 December 5,856 1,570 Group 2008 Held to Available for Loans and maturity sale receivables m m m As at 1 January 2,515 1,982 - Exchange differences on monetary assets - (7) (10) Revaluation - (43) - Additions - 2,203 - Maturities / disposals (2,514) (849) (2) Effective interest (1) 24 5 Amortisation to statement of comprehensive income Reclassification - (1,968) 1,968 As at 31 December - 1,342 1,

105 Notes to the Group Financial Statements 5. Debt securities (continued) Company 2009 Available for Loans and sale receivables m m As at 1 January 1,313 8,168 Exchange differences on monetary assets (2) (5) Revaluation 42 - Additions 4,797 - Maturities / disposals (300) (1,583) Effective interest 6 6 Amortisation to statement of comprehensive income - 15 As at 31 December 5,856 6,601 Company 2008 Held to Available for Loans and maturity sale receivables m m m As at 1 January 2,515 1,982 4,173 Exchange differences on monetary assets - (7) (10) Revaluation - (43) - Additions - 2,174 2,360 Maturities / disposals (2,514) (849) (337) Effective interest (1) 24 5 Amortisation to statement of comprehensive income Reclassification - (1,968) 1,968 As at 31 December - 1,313 8, Equity shares and units in unit trusts Group m m Designated as FVTPL - Listed 13,381 10,262 - Unlisted ,510 10, Derivative instruments The group uses derivatives in both its banking and insurance businesses. Within the banking operations, derivatives are used to reduce interest and foreign currency exchange rate exposures (fair value hedges) and to generate incremental income for the group (trading). In the insurance business derivatives are used to match fixed-rate or tracker bond liabilities arising on insurance or investment contracts and within the unitised investment funds which match unit-linked policyholder liabilities as part of the efficient portfolio management of these funds. Derivatives have also been purchased for Constant Proportion Portfolio Insurance (CPPI) unitised investment funds. In turn, the CPPI counterparty has purchased a zero-strike option from the insurance company. In the case of derivatives entered into for the benefit of unit-linked policyholders, all of the risks are borne by the policyholder. The insurance business also has a fair value hedge to reduce interest rate exposure on a subordinated debt issue. All derivatives are carried at fair value. Derivatives not qualifying as fair value hedges are classified as trading in the note below. The movement in the valuation of life derivatives is included in investment return. Overview Business Review Corporate Governance Financial Statements 105

106 Notes to the Group Financial Statements 7. Derivative instruments (continued) The derivatives used include: - Currency forward rate contracts which are commitments to purchase and sell currencies, including undelivered spot transactions; - Currency and interest rate swaps which are commitments to exchange one set of cash flows for another, for example, fixed interest rates for floating interest rates; - Futures contracts which may be for currency, interest rates or equity indices and are contractual obligations to pay or receive an amount based on changes in exchange rates, interest rates or equity indices; - Forward rate agreements which are contracts that give rise to a cash settlement at a future date for the difference between a contracted rate of interest and the interest rate at the date of settlement based on a notional principal amount; and - Options which are contractual agreements under which the seller grants the purchaser the right but not the obligation to buy (a call option) or to sell (a put option) at a set date or during a set period a specific amount of a currency or a financial instrument at a specified price. Options may be traded on an exchange or negotiated between two parties. Further details on the group s risk management policies are set out in Note 34 Financial risk management. The fair value of derivative instruments is set out below: Fair value Fair value Fair value Fair value asset liability asset liability m m m m Derivatives held by banking operations - designated as fair value hedges held for trading Derivatives held by life operations - designated as fair value hedges held for trading Total derivative instruments 1, , Fair value hedges The losses recognised in income on the hedging instruments designated as fair value hedges and the gains on the hedged items recognised in income attributable to the hedged risk are analysed below: m m Losses on hedging instruments (123) (264) Gains on hedged items attributable to hedged risk Net losses (12) (16) These gains and losses are recognised in Note 39 Net interest income. 106

107 Notes to the Group Financial Statements 7. Derivative instruments (continued) Net investment in foreign operations The following gains / (losses) have been recorded in other comprehensive income in respect of hedging instruments held to manage the group's net investment in foreign operations in addition to the gains / (losses) on the net investment: m m Net (losses) / gains in respect of hedging instruments held for net investment in foreign operations (2) 12 Gains / (losses) in respect of hedged net investment in foreign operations 2 (12) Gains / (losses) in respect of unhedged net investment in foreign operations 1 (3) Total gains / (losses) in respect of net investment 3 (15) Banking operations Fair value hedges by the banking operations are analysed as follows: Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability m m m m m m Currency swaps 8, , Interest rate swaps 14, , , , Trading derivatives are analysed below. Generally derivative assets are matched by derivative liabilities and reflect the closing of trading positions by instruments of equal duration Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability m m m m m m Currency swaps Interest rate swaps 4, , , , Interest rate swap liabilities include 0.5m (2008: 0.5m) embedded derivatives linked to subordinated debt issued as disclosed in Note 29 Subordinated liabilities. Overview Business Review Corporate Governance Financial Statements 107

108 Notes to the Group Financial Statements 7. Derivative instruments (continued) Life operations Life operations derivatives are analysed as follows: Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability m m m m m m Designated as fair value hedges - Interest rate swap Held for trading - held in unitised / closed funds for the benefit of policyholders 5, , zero-strike option to return growth in unitised fund to CPPI counterparty held to match fixed-rate and tracker bond liabilities , , Total life operations 6, , Derivatives held in unitised / closed funds for the benefit of unit linked policyholders are as follows: Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability m m m m m m CPPI Interest rate swaps Currency swaps 3, , Equity futures 1, , , Derivatives held to match fixed rate and tracker bond liabilities within insurance operations are analysed as follows: Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability m m m m m m Interest rate swaps OTC options

109 Notes to the Group Financial Statements 7. Derivative instruments (continued) All of the group's banking operations derivative exposures are held by the parent company. The parent company may also enter into derivative transactions with subsidiaries. The fair value of the parent company derivative instruments is as follows: Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability m m m m m m - designated as fair value hedges 23, , held for trading 4, , held with subsidiaries 1, ,378 28, , , Loans and receivables to customers Loans and receivables by category are set out below: Group Company m m m m Residential mortgage loans Held through special purpose vehicles 25,983 25,404 19,441 19,164 Held directly 9,189 10,104 7,778 8,754 35,172 35,508 27,219 27,918 Commercial mortgage loans* 1,939 1,978 1,939 1,978 Consumer finance Finance leases 1,211 1, Term loans / other Money market funds Loans to subsidiaries - - 8,618 8,744 Gross loans and receivables to customers 39,069 40,214 38,523 39,634 Less allowance for impairment (477) (139) (358) (89) Net loans and receivables to customers 38,592 40,075 38,165 39,545 *Commercial mortgage loans exclude loans of 447m (2008: 425m) to the group's life assurance operations including loans held for the benefit of unit linked policyholders. There is no particular concentration of risk within these categories. Loans and receivables can be analysed into fixed and variable-rate loans as follows: Group Company m m m m Variable rate 32,676 28,815 26,221 23,988 Fixed rate 5,916 11,260 3,326 6,813 38,592 40,075 29,547 30,801 Loans to subsidiaries Interest bearing - - 8,268 8,410 Non interest bearing ,618 8,744 38,592 40,075 38,165 39, Overview Business Review Corporate Governance Financial Statements

110 Notes to the Group Financial Statements 8. Loans and receivables to customers (continued) The group has established a number of special purpose vehicles which involve the selling of pools of residential mortgages to the special purpose vehicles which issue mortgage backed floating rate notes ( notes ) to fund the purchase of these mortgage pools. The notes are secured by a first fixed charge over the residential mortgages in each pool. The notes may be sold to investors or held by the group and used as collateral for borrowings. Details of the residential mortgage pools sold to special purpose vehicles and the notes issued by the special purpose vehicles are included below: bln bln Residential mortgages held through special purpose vehicles Notes issued by special purpose vehicles - rated unrated The notes issued by these special purpose vehicles comprise of the following: bln bln - Sold to third parties and included within debt securities in issue (non-recourse) on the statement of financial position Held by the European Central Bank ("ECB") as collateral in respect of funds raised under the Eurosystem funding programme (note 20) Held by other banks as part of collateralised lending or sale and repurchase agreements Held by Irish Life Assurance plc as collateral for government securities under a stock lending agreement with the bank operations of the group Held as collateral against deposits placed by the life operations with the banking operations of the group Other Available collateral Unrated notes See Note 20 Deposits by banks for amounts placed by the ECB with Irish Life & Permanent plc. 2 Government securities held by the bank under a stock-lending agreement with Irish Life Assurance plc amount to 0.1bln at 31 December 2009 (2008: 1.1bln). The stock-lending agreement provides for a minimum collateral value of 150% of Aaa-rated bonds to be maintained in respect of the government securities borrowed. 3 The collateral agreement for the deposits provides for a minimum collateral value of 130% Aaa-rated bonds to be maintained in respect of the deposits in In accordance with accounting standards these transactions were eliminated in the consolidated financial statements. This arrangement is no longer in place. Details of provisions for loan impairments are set out in Note 9 Provision for impairment. At 31 December 2008, the group had drawn down nil against an available facility of 163m under the mortgage-backed promissory note programme with the Central Bank and Financial Services Authority of Ireland (CBFSAI) which was secured by way of a first floating charge to the CBFSAI of loans and receivables of 209m. This facility was not available in December

111 Notes to the Group Financial Statements 8. Loans and receivables to customers (continued) Finance leases net of provision include the following: m m Finance leases receivables gross of future income No later than 1 year Later than 1 year and no later than 5 years Later than 5 years ,229 1,844 Unearned future finance income on finance leases No later than 1 year (35) (52) Later than 1 year and no later than 5 years (44) (88) Later than 5 years (1) (2) (80) (142) Total 1,149 1,702 Present value of minimum lease payments analysed by residual maturity No later than 1 year Later than 1 year and no later than 5 years Later than 5 years ,149 1,702 Provision for uncollectable minimum payments receivable* Unguaranteed residual values accruing to the benefit of the group n/a n/a *This provision is disclosed in Note 9 Provision for impairment within the "consumer finance" category. Finance leases normally have a term of five years or less. 9. Provision for impairment Group provision for impairment a) Loans and receivables 2009 Specific Collective Total m m m As at 1 January Charge to income statement Impairment losses Amounts written off during the year (10) (30) (40) Exchange movements As at 31 December Overview Business Review Corporate Governance Financial Statements 111

112 Notes to the Group Financial Statements 9. Provision for impairment (continued) Group provision for impairment (continued) a) Loans and receivables (continued) 2008 Specific Collective Total m m m As at 1 January Charge to income statement Impairment losses Amounts recovered during the year - (1) (1) Amounts written off during the year (2) (12) (14) Exchange movements (3) (1) (4) As at 31 December Analysis of income statement charge 2009 Specific Collective Total m m m ROI residential lending ROI commercial lending UK lending Consumer finance Specific Collective Total m m m ROI residential lending ROI commercial lending UK lending Consumer finance Analysis of amounts written off during the year 2009 Specific Collective Total m m m ROI residential lending (1) - (1) UK lending (9) - (9) Consumer finance - (30) (30) As at 31 December (10) (30) (40) 2008 Specific Collective Total m m m UK lending (2) - (2) Consumer finance - (12) (12) As at 31 December (2) (12) (14) 112

113 Notes to the Group Financial Statements 9. Provision for impairment (continued) Group provision for impairment (continued) a) Loans and receivables (continued) Analysis of provisions 2009 Specific Collective Total m m m ROI residential lending ROI commercial lending UK lending Consumer finance As at 31 December Specific Collective Total m m m ROI residential lending ROI commercial lending UK lending Consumer finance As at 31 December b) Debt securities m m As at 1 January Charge to income statement Impairment losses* Amounts written off during the year (103) - As at 31 December *Impairment losses relate to the impairment of Icelandic bank securities and Lehman Brothers securities. The provisions in relation to rogue solicitors disclosed at 31 December 2008 have been incorporated into the above provisions. Company provision for impairment a) Loans and receivables 2009 Specific Collective Total m m m As at 1 January Charge to income statement Impairment losses Amounts written off during the year (1) (6) (7) As at 31 December Overview Business Review Corporate Governance Financial Statements 113

114 Notes to the Group Financial Statements 9. Provision for impairment (continued) Company provision for impairment (continued) a) Loans and receivables (continued) 2008 Specific Collective Total m m m As at 1 January Charge to income statement Impairment losses Amounts written off during the year - (7) (7) As at 31 December Analysis of income statement charge 2009 Specific Collective Total m m m ROI residential lending ROI commercial lending Consumer finance Specific Collective Total m m m ROI residential lending ROI commercial lending Consumer finance Analysis of amounts written off during the year 2009 Specific Collective Total m m m ROI residential lending (1) - (1) Consumer finance - (6) (6) (1) (6) (7) 2008 Specific Collective Total m m m Consumer finance - (7) (7) - (7) (7) Analysis of provisions 2009 Specific Collective Total m m m 114 ROI residential lending ROI commercial lending Consumer finance As at 31 December

115 Notes to the Group Financial Statements 9. Provision for impairment (continued) Company provision for impairment (continued) a) Loans and receivables (continued) 2008 Specific Collective Total m m m ROI residential lending ROI commercial lending Consumer finance As at 31 December b) Debt securities m m As at 1 January Charge to income statement Impairment losses* Amounts written off during the year (103) - As at 31 December *Impairment losses relate to the impairment of Icelandic bank securities and Lehman Brothers securities. The provisions in relation to rogue solicitors disclosed at 31 December 2008 have been incorporated into the above provisions. 10. Loans and receivables to banks Group Company m m m m Held at amortised cost Repayable on demand (note 4) 2,510 1,956 2,510 1,951 Other loans and receivables to banks ,604 1,994 2,600 1,988 Designated as FVTPL Life operations deposits with banks 2,321 2, ,925 4,775 2,600 1,988 At 31 December 2009, loans and receivables to banks include 0.65bln deposits placed with one financial institution (2008: 1.7bln with two financial institutions) covered by the Irish Government guarantee scheme. This covered institution placed 0.65bln (2008: 1.1bln) with Irish Life & Permanent plc on the same terms and the 0.65bln (2008: 1.1bln) is included in Note 20 Deposits by banks. No right of set-off exists between these deposits by banks and the loans and receivables to banks. They are recorded in loans and receivables to banks in accordance with accounting standards. Overview Business Review Corporate Governance Financial Statements 115

116 Notes to the Group Financial Statements 11. Investment properties Group Company m m m m As at 1 January 2,280 3,561-1 Additions from acquisitions Additions from subsequent expenditure Transfer from property and equipment (note 13) Disposals (33) (310) - - Fair value adjustments (note 43) (517) (1,433) - (1) As at 31 December 1,769 2, Investment property is held for capital appreciation and income and is let on a commercial basis to third parties. Investment property is carried at fair value as determined by an independent valuer having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Fair values take into account recent occupancy and rental levels and are based on yields which are applied to arrive at the property valuation. There are low levels of liquidity in the Irish investment property market and transaction levels are significantly reduced resulting in a lack of clarity as to pricing and market drivers. In the Irish market this has resulted in significant falls in the market value during the year. The UK market has seen an improvement in transaction levels which has resulted in an improved visibility on pricing in that market. In Ireland, investment properties currently on the market typically involve vendors who are compelled to sell or purchasers who will only buy at discounted prices. In this environment, prices and values are experiencing a period of heightened volatility while the market absorbs these various issues and reaches its conclusion. At 31 December ,751m (2008: 2,253m) of investment properties are held by unit-linked funds. The yield spreads used in the independent valuations were as follows: Sector ROI UK ROI UK Office Prime 6.80%-9.96% 5.00%-8.00% 5.10%-6.50% 5.18%-7.33% Suburban 6.91%-12.01% 6.76%-8.92% 6.25%-8.50% 6.52%-9.45% Provincial 7.57%-12.51% 5.35%-10.00% 6.10%-9.00% 6.86%-10.27% Industrial Prime 7.80%-11.34% 7.64%-9.26% 7.00%-8.00% 6.77%-11.42% Secondary 8.1%-11.78% 11.25% 8.00%-8.80% 6.39%-9.24% Provincial 13.30% % - Retail Prime high street 6.00%-8.76% 4.74%-7.39% 4.50%-5.50% 4.86%-7.30% Secondary 6.65%-8.54% %-7.50% - Shopping centre 7.72%-10.08% 9.39% 6.55%-7.15% 7.25% Retail warehousing 7.57%-8.81% 7.04%-8.18% 6.00%-6.80% 5.52%-9.20% Provincial 7.04%-9.38% 6.26%-9.82% 5.50%-7.00% 6.95% Residential Residential properties are valued on a capital value per square foot rather than on basis of investment yield. Residential properties represent 0.5% of total investment property. 116

117 Notes to the Group Financial Statements 11. Investment properties (continued) Investment properties as at 31 December 2009 are analysed as follows: ROI UK Other Total m m m m Residential Office ,029 Industrial Retail , ,769 Investment properties as at 31 December 2008 are analysed as follows: ROI UK Other Total m m m m Residential Office ,110 Industrial Retail , ,280 The acquisition of certain investment properties on behalf of unit-linked policyholders is funded by borrowing. These borrowings, which have recourse only to the specific property which they were used to acquire, amounted to 610m at 31 December 2009 (2008: 591m). At 31 December m (2008: 354m) borrowings were issued by Irish Life & Permanent plc and were eliminated on consolidation. The remaining balance of borrowings is contained within Note 20 Deposits by banks. As a result of the decrease in the values of investment properties, there were some breaches of loan-to-value terms attached to certain borrowings, otherwise, facilities are in order. The group is engaged in negotiations with the relevant lenders. To date there has been no amendments to the group's obligations attached to these borrowings. The group continues to fulfil all its repayment obligations for such borrowings. Property held under long leasehold interest at 31 December 2009 was 48m (2008: 64m). There are no future payments under these leases. There are no contingent rents on these properties. 12. Interest in subsidiary and associated undertaking (a) Group's interest in associated undertaking The group owns 30.43% (2008: 30.43%) of Allianz-Irish Life Holdings plc, an unlisted general insurance company operating in Ireland. The group's share of Allianz-Irish Life Holding plc net assets are as follows: m m As at 1 January Share of results before tax (2) 27 Share of tax - (4) Share of capital reserve - (1) Dividends paid (15) (30) As at 31 December Overview Business Review Corporate Governance Financial Statements 117

118 Notes to the Group Financial Statements 12. Interest in subsidiary and associated undertakings (continued) Summary financial information on Allianz-Irish Life Holdings plc (100%) is as follows: m m Assets 1,677 1,732 Liabilities 1,277 1,276 Equity Gross premium written (Loss) / profit after tax (5) 76 The group's share of losses of Allianz-Irish Life Holdings plc for the was 2m (2008: profit 23m). (b) Company's interest in subsidiary undertakings m m As at 1 January 2,855 2,855 Additions - - As at 31 December 2,855 2,855 (c) Acquisition of Merrill Lynch interest in Joint Mortgage Holdings No.1 Limited (parent of Springboard Mortgages Limited) At 31 December 2007, the group owned 50% of Joint Mortgage Holdings No.1 Limited (parent of Springboard Mortgages Limited), a specialist mortgage lender, established as a joint venture with Merrill Lynch. On 30 June 2008, IL&P acquired the remaining 50% of Joint Mortgage Holdings No.1 Limited from Merrill Lynch. The assets and liabilities were acquired at fair value for nil consideration and no goodwill arose on acquisition. As at 31 December 2008, the balances of Joint Mortgage Holdings No.1 Limited were included in the consolidated numbers as detailed below: Group 2008 m As at 1 January - Additions 1 Share of results (1) As at 31 December - Company 2008 m As at 1 January - Additions 1 Writedown of investment (1) As at 31 December - Details of the group's principal subsidiary and associated undertaking are set out in Note 53 Principal subsidiary and associated undertaking. 118

119 Notes to the Group Financial Statements 13. Property and equipment Group 2009 Office and Land and computer Motor buildings equipment vehicles Total m m m m Cost or valuation As at 1 January Additions Valuation (113) - - (113) Disposals - (4) (3) (7) Impairment (9) - - (9) Reclassification (5) 6 (1) - As at 31 December Depreciation As at 1 January Provided in the year (note 46) Disposals - (3) (2) (5) Valuation (16) - - (16) Reclassification (5) 6 (1) - As at 31 December Net book value as at 31 December Office and Land and computer Motor buildings equipment vehicles Total m m m m Cost or valuation As at 1 January Additions Valuation (150) - - (150) Disposals (2) (2) (6) (10) Reclassification to investment property (note 11) (5) - - (5) Reclassification to software (note 15) - (1) - (1) Currency exchange - (1) - (1) As at 31 December Depreciation As at 1 January Provided in the year (note 46) Disposals - (1) (3) (4) Valuation (16) - - (16) Currency exchange - (1) - (1) As at 31 December Net book value as at 31 December Overview Business Review Corporate Governance Financial Statements 119

120 Notes to the Group Financial Statements 13. Property and equipment (continued) Company 2009 Office and Land and computer Motor buildings equipment vehicles Total m m m m Cost or valuation As at 1 January Additions Valuation (67) - - (67) Disposals - - (1) (1) Reclassification (5) 7-2 Impairment (3) - - (3) As at 31 December Depreciation As at 1 January Provided in the year Valuation (16) - - (16) Disposal - - (1) (1) Reclassification (5) 7-2 As at 31 December Net book value as at 31 December Office and Land and computer Motor buildings equipment vehicles Total m m m m Cost or valuation As at 1 January Additions Valuation (49) - - (49) Disposals (92) - (2) (94) As at 31 December Depreciation As at 1 January Provided in the year Valuation (2) - - (2) Disposals (2) - (1) (3) As at 31 December Net book value as at 31 December Land and buildings were revalued at 31 December Valuations were carried out by registered, independent appraisers having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Values take into account recent market transactions for similar properties. Valuations have used yields ranging from 6.86% to 8.2%, depending on the property size and location. In relation to the larger head office buildings, vacant periods of 2 to 3 years have been applied. 120

121 Notes to the Group Financial Statements 13. Property and equipment (continued) The net book value of land and buildings include the following: Group Company m m m m Buildings - freehold Buildings - leasehold Land The historic cost of land and buildings in the group is 169m (2008: 170m). 14. Shareholder value of in-force business The shareholder value of in-force business for insurance contracts is computed using EEV principles issued in May 2004 by the European Chief Financial Officers forum. Shareholder value of in-force business represents the present value of future shareholder cash flows less a deduction for the cost of required capital and before allowing for tax and includes a deduction for the time value of financial options and guarantees. Further details of the EV principles are set out in the supplementary EV basis on pages 216 to 218. A. Assumptions The principal assumptions are set out below: Principal economic assumptions The assumed future pre-tax returns on fixed-interest securities are set by reference to gross redemption yields available in the market at the end of the reporting period. The risk-free rate of return used for the risk discount rate is based on the Irish Government yield available for the effective duration of the future cash flows underlying the shareholder value of in-force business. The market risk margin neutralises the effect of assuming future investment returns in excess of the base risk-free rate. The corresponding return on equities and property is equal to the risk-free rate assumption plus the appropriate risk premium. An asset mix based on the assets held at the valuation date within policyholder funds has been assumed within the projections. 31 December 31 December 31 December Equity risk premium 3.0% 3.0% 3.0% Property risk premium 2.0% 2.0% 2.0% Risk-free rate 4.6% 4.1% 4.4% Non market risk margin 2.1% 2.1% 2.1% Market risk margin 0.8% 0.8% 1.3% Risk discount rate 7.5% 7.0% 7.8% Investment return - Fixed interest 1.1% - 4.2% 2.7% - 4.3% 3.9% - 4.7% - Equities 7.6% 7.1% 7.4% - Property 6.6% 6.1% 6.4% Expense inflation 3.0% 3.0% 4.5% Overview Business Review Corporate Governance Financial Statements 121

122 Notes to the Group Financial Statements 14. Shareholder value of in-force business (continued) Other assumptions The assumed future mortality and morbidity assumptions are based on published tables of rates, adjusted by analyses of recent operating experience. Persistency assumptions are set by reference to recent operating experience. Further details of assumptions are included in Note 24 Life insurance contracts including insurance contracts with discretionary participation features (DPF). The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business and the maintenance of business in-force. No allowance has been made for future productivity improvements in the expense assumptions. Projected tax has been determined assuming current tax legislation and rates. B. Analysis of the movement in the year The change in the shareholder value of in-force assets is analysed as follows: m m As at 1 January (Debit) / credit in income statement in the year (57) 70 As at 31 December The debit to the income statement of 57m negative (2008: credit of 70m positive) includes 99m positive (2008: 121m positive) in respect of new business; 88m negative (2008: 86m negative) expected return on existing business; 33m negative (2008: 20m positive) in respect of experience variances; 7m negative (2008: 17m positive) in respect of operating assumptions changes; 8m positive (2008: 62m negative) in respect of short-term investment fluctuations and 36m negative (2008: 60m positive) in respect of economic assumption changes. C. Sensitivity calculations A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the insurance shareholder value of in-force asset to changes in key assumptions. The details of each sensitivity are set out below. All amounts are after allowing for the associated deferred tax effect: - 1% decrease in discount rate would increase equity by 64m; - 1% increase in discount rate would reduce equity by 56m; - 10% decrease in maintenance expenses would increase equity by 19m; - 10% improvement in assumed persistency rates would increase equity by 12m; and - 5% decrease in both mortality and morbidity rates would increase equity by 21m. 122

123 Notes to the Group Financial Statements 15. Intangible assets Group 2009 Software Other Total m m m Cost As at 1 January Additions 9-9 Write-off (1) - (1) Reclassification Impairment (4) - (4) As at 31 December Amortisation As at 1 January Amortisation for the year (note 46) Impairment (2) - (2) Write-off (1) - (1) Reclassification As at 31 December Net book value as at 31 December Software Other Total m m m Cost As at 1 January Additions Disposals (3) - (3) Reclassification from property and equipment (note 13) 1-1 As at 31 December Amortisation As at 1 January Amortisation for the year (note 46) Disposals (3) - (3) As at 31 December Net book value as at 31 December Overview Business Review Corporate Governance Financial Statements 123

124 Notes to the Group Financial Statements 15. Intangible assets (continued) Company Software Software m m Cost As at 1 January Additions 1 5 Reclassification (2) - As at 31 December Amortisation As at 1 January Amortisation for the year 6 7 Reclassification (2) - As at 31 December Net book value as at 31 December Goodwill Group m m As at 1 January Additions 4 38 Impairment - (170) As at 31 December Company m m As at 1 January Additions - - Impairment - (170) As at 31 December - - Goodwill is attributable to two business units as set out below: Goodwill is allocated to the group's operating divisions which represent the lowest level within the group at which goodwill is monitored for internal management purposes and is not higher than the group's operating segments as reported in Note 3 Segmental information. Group m m Life assurance 5 5 Brokerage and third party administration The goodwill acquired during the of 4m arose on the acquisition of the remaining 2% non-controlling interest in Cornmarket Group Financial Services Limited. 124

125 Notes to the Group Financial Statements 16. Goodwill (continued) The goodwill acquired during 2008 of 38m arose on the acquisition of 22.94% of the non-controlling interest in Cornmarket Group Financial Services Limited. No impairment losses on goodwill were recognised during The impairment of goodwill during 2008 of 170m relates to an unamortised balance arising from the acquisition of TSB Bank in This balance has been written off given the divergence between the market value of banking operations in current market conditions and the carrying value. The carrying goodwill value is tested for impairment by calculating the recoverable amount. The recoverable amount is based on value in-use calculations of cash-generating units using cash flow projections based on actual operating results and future business plans, discounted at an appropriate rate. Where appropriate the embedded value has been used as a conservative proxy for discounted cash projections. The determination of cash flows and discount rates require the exercise of judgement. The calculation of the value in-use was based on the following key assumptions: Cash flows were projected based on past experience, actual operating results and future business plans and assume no future growth (2008: 0%). Cash flows for a period of seven years (2008: five years) based on 2009 actuals and 2010 business plans were used. The forecast period is based on the group's long-term perspective with respect to the operation of these cash-generating units. A pre-tax discount rate of 12.5% (2008: 12%) was applied in determining the recoverable amounts for the cash generating units. The discount rate is based on the rate used in calculating the future cash flows for shareholder value of in-force business with an additional risk premium of 5% (2008: 5%). The key assumptions described above may change as economic and market conditions change. The group estimates that reasonably possible changes in these assumptions are not expected to cause the recoverable amount of either cash-generating unit to decline below the carrying amount. 17. Other assets Group m m Amounts falling due within one year Amount due from policyholders Amount due from intermediaries 2 1 Investment trading balances 1 12 Other debtors Company m m Amounts falling due within one year Amount due from subsidiary undertakings Other debtors Deferred acquisition costs m m As at 1 January Arising in the year (note 40) Charge to income arising in the year (note 40) (56) (52) As at 31 December Overview Business Review Corporate Governance Financial Statements 125

126 Notes to the Group Financial Statements 19. Retirement benefit obligations Defined benefit schemes The group operates six Irish defined benefit pension schemes and two small UK defined benefit schemes for employees. All of the defined benefit schemes are funded by the payment of contributions into separately administered trust funds. The benefits paid from the defined benefit scheme are based on percentages of the employees' final pensionable pay for each year of credited service. The pension costs and provisions are assessed in accordance with the advice of independent qualified actuaries. Valuations are carried out every three years by independent actuarial consultants. The actuarial reports are available for inspection by members of the scheme and are not available for public inspection. All of the group's defined benefit pension schemes have been revalued within the last three years with valuation dates ranging from 1 March 2007 to 30 September Actuarial gains and losses are accounted for under the corridor approach as set out in Note 1 Basis of preparation and significant accounting policies. The key financial assumptions used are: Group Company % % % % Actuarial assumptions at the statement of financial position date Discount rate Expected rate of return on plan assets Salary increases Pension increases Rate of price inflation In addition to the salary inflation assumption above an assumed salary scale is also allowed for. The main post-retirement mortality assumptions used at 31 December 2009 were 95% PA92 (c=2025) less two years (2008: 100% PA92 (c=2025) less two years) for pensioners and 95% PA92 (c=2040) less two years (2008: 100% PA92 (c=2040 less two years) for active / deferred members. On this basis the life expectancies underlying the value of the schemes liabilities at 31 December 2009 and 31 December 2008 were the following: Years Years Retiring today age 65 Males Females Retiring in 15 years time aged 65 Males Females Amounts recognised in the income statement in respect of these defined benefit schemes are: Group Company m m m m Current service cost Past service cost Interest cost Expected return on scheme assets (63) (83) (23) (28) Amortisation of corridor excess This charge has been included in administrative expenses. 126

127 Notes to the Group Financial Statements 19. Retirement benefit obligations (continued) Unrecognised actuarial gains or losses which are outside the corridor under IAS 19 are amortised in the income statement over the estimated remaining service lives of the members which averaged seventeen years in 2009 (2008: twenty one years). The actual return on scheme assets was 131m (2008: negative 359m) in the group and 47m in the company (2008: negative 117m). The actual return is calculated as follows: Group Company m m m m Expected return on plan assets Actuarial gain / (loss) on plan assets 68 (442) 24 (145) 131 (359) 47 (117) The expected return on assets is determined by calculating a total return estimate based on weighted average estimated returns for each asset class. Asset class returns are estimated using current and projected economic and market factors such as inflation, credit spreads and equity risk premiums. The expected rates of return for equities and property were calculated by allowing for a risk premium over prevailing long-dated bond yields. The equity rate allows for a yield on 30-year Eurozone Government bonds of 4.30% (2008: 3.80%) together with an equity risk premium of 3.60% (2008: 4.95%), giving a total of 7.90% (2008: 8.75%). For property, a risk premium 1% lower than for equities was adopted for the years ended 31 December 2009 and 31 December The expected rate of return on bonds reflected the prevailing yield on the specific portfolio of nominal and inflation-linked long-dated bonds for the years ended 31 December 2009 and 31 December The effect of the major categories of plan assets on the overall expected rate of return on assets is set out in the table on the long-term rate of return expected for each class of asset on page 129. The movements in the present value of defined benefit obligations in the year are: Group Company m m m m Benefit obligation as at 1 January (1,183) (1,293) (519) (568) Current service cost (34) (45) (16) (21) Interest cost (70) (73) (30) (32) Past service cost (8) (1) (2) (1) Actuarial gain / (loss) - experience adjustments 97 (19) assumption changes (52) 230 (39) 95 Contributions by plan participants (7) (7) (3) (3) Benefits paid Exchange and other adjustments Benefit obligation as at 31 December (1,225) (1,183) (589) (519) Overview Business Review Corporate Governance Financial Statements 127

128 Notes to the Group Financial Statements 19. Retirement benefit obligations (continued) The movement in the fair value of defined benefit assets in the year are: Group Company m m m m Fair value of plan assets as at 1 January 928 1, Expected return on plan assets Employer contribution Contributions by plan participants Actuarial gain / (loss) 68 (442) 24 (145) Benefits paid (32) (24) (12) (10) Fair value of plan assets as at 31 December 1, The pension assets and liabilities recognised on the statement of financial position are as follows: Group Company m m m m m m m m m m Benefit obligation as at 31 December (1,225) (1,183) (1,293) (1,211) (1,238) (589) (519) (568) (556) (563) Fair value of plan assets as at 31 December 1, ,262 1,277 1, Net (obligation) / asset (132) (255) (31) 66 (130) (187) (186) (141) (131) (206) Unrecognised actuarial losses / (gains) (45) (152) (1) (9) 65 Net recognised retirement benefit obligation (63) (69) (76) (86) (87) (132) (137) (142) (140) (141) The experience adjustments arising on plan liabilities and plan assets are as follows: Group Company Actuarial (gains) / losses - arising on benefit obligation ( m) (97) (8) arising on benefit obligation (% of plan liabilities) (8) (1) Actuarial gains / (losses) - arising on plan assets ( m) 68 (442) (116) (145) (40) arising on plan assets (% of plan assets) 6 (48) (9) (44) (9)

129 Notes to the Group Financial Statements 19. Retirement benefit obligations (continued) The movement in the present value of defined benefit obligations in the year are: Group Company m m m m Net post-retirement benefit obligations as at 1 January (69) (76) (137) (142) Expense recognised in income statement (53) (36) (26) (26) Contributions paid Exchange and other adjustments Net post-retirement benefit obligations as at 31 December (63) (69) (132) (137) Net post-retirement benefit assets Net post-retirement benefit liabilities (159) (158) (143) (142) Net post-retirement benefit obligations (63) (69) (132) (137) The following tables set out, on a combined basis for all schemes, the fair value of the assets held by the schemes together with the long-term rate of return expected for each class of asset for the group and the company. Group Long term Long term rate of return Fair Plan rate of return Fair Plan expected value assets expected value assets % m % % m % Equities Bonds Property Other Fair value of plan assets as at 31 December , Company Long term Long term rate of return Fair Plan rate of return Fair Plan expected value assets expected value assets % m % % m % Equities Bonds Property Other Fair value of plan assets as at 31 December The fair value of plan assets includes investments in Irish Life Assurance unit-linked funds which on occasion include investments relating to Irish Life & Permanent plc shares or properties occupied by Irish Life & Permanent group. As at 31 December 2009, the group's pension scheme assets had an indirect holding in Irish Life & Permanent plc shares of 2m (company: 0.7m) (2008: 2m (company: 1m)) and an indirect holding of properties occupied by the Irish Life & Permanent group of 0.2m (company: 0.1m) (2008: 0.2m (company: 0.1m)). Overview Business Review Corporate Governance Financial Statements 129

130 Notes to the Group Financial Statements 19. Retirement benefit obligations (continued) The group is expected to pay contributions of approximately 35m to the pension schemes in If the discount rate was 0.5% lower than the assumption made at 31 December 2009 then the present value of defined benefit obligations (for the five main pension schemes in the group) would increase by approximately 128m (group) and 62m (company), all of which would be included as unrecognised actuarial losses. A similar effect would arise if the rate of increase in salaries and pensions was to rise by 0.5% over the assumptions used at 31 December If the expectation of life post-retirement increased by one year, then the present value of defined benefit obligations (for the five main pension schemes in the group) would increase by approximately 24m (group) and 11m (company), all of which would be included as unrecognised actuarial losses. 20. Deposits by banks Group Company m m m m Deposits by banks 18,713 18,546 17,842 17,581 18,713 18,546 17,842 17,581 Deposits by banks include the following: Group bln bln Placed by the European Central Bank ("ECB") Placed by other banks Held as a result of repurchase agreements Collateral held for investments for unit-linked funds (CPPI) Interbank deposits Other Balances placed by the European Central Bank ("ECB") Maximum Average The deposits made by the ECB are secured on 13.7bln notes issued by special purpose vehicles controlled by the group. The notes are secured by a first fixed charge over residential mortgages held by the special purpose vehicles which are included in Note 8 Loans and receivables to customers. 2 These deposits are collateralised on 1.3bln of notes issued by special purpose vehicles controlled by the group. The notes are secured by a first fixed charge over residential mortgages held by the special purpose vehicles, which form part of the group's consolidated financial statements. 3 These deposits were placed by a bank covered under the Irish Government guarantee scheme (2008: two banks) on the same terms as deposits placed with this institution by Irish Life Assurance plc (Note 10 Loans and receivables to banks). Because no right of set-off existed between these deposits by banks and the loans and receivables to banks, they are recorded in deposits by banks in accordance with accounting standards. 130

131 Notes to the Group Financial Statements 21. Customer accounts Group Company m m m m Repayable on demand 3,503 3,866 3,410 3,866 Other 11,059 10,252 10,693 9,784 Due to subsidiary undertakings - - 6,727 5,902 14,562 14,118 20,830 19,552 Customer accounts exclude deposits of 1,251m (2008: 613m) from the group's non-banking operations including deposits held for the benefit of unit-linked policyholders. 22. Debt securities in issue Group Company m m m m At amortised cost Bonds and medium-term notes 7,855 5,928 7,855 6,028 Other debt securities in issue 3,043 2,446 2,618 2,021 Non-recourse funding 2,364 2, Debt securities in issue to subsidiaries - - 2,085 2,127 13,262 10,899 12,558 10, m m m m Repayable in not more than 1 year 8,132 3,210 8,209 3,329 Repayable in more than 1 year but not more than 2 years 1,395 2,484 1,395 2,488 Repayable in more than 2 years but not more than 5 years 452 1, ,626 Repayable in more than 5 years 3,283 3,585 2,502 2,733 13,262 10,899 12,558 10,176 Bonds and medium-term notes exclude 77m (2008: 129m) of debt securities issued by the group held in the group's life assurance operations which have been eliminated on consolidation. Other debt securities in issue Other debt securities in issue at 31 December 2009 included 425m (2008: 425m) advances secured on notes issued by special purpose vehicles which are secured on residential property. These loans which have not been derecognised, are shown within loans and receivables to customers and the funding is shown as a separate liability. Non-recourse funding At 31 December 2009, the group had advances secured on residential property subject to non-recourse funding. These loans, which have not been derecognised, are shown within loans and receivables to customers and the non-recourse funding is shown as a separate liability. The securitisations involve the selling of pools of mortgages to special purpose entities which issue mortgage backed floating notes ("notes") to fund the purchase of these mortgage pools. Overview Business Review Corporate Governance Financial Statements 131

132 Notes to the Group Financial Statements 22. Debt securities in issue (continued) Under the terms of these securitisations, the rights of the providers of the related funds are limited to the mortgage loans in the securitised portfolios and any related income generated by the portfolios, without recourse to Irish Life & Permanent plc. Irish Life & Permanent plc is not obliged to support any losses in respect of the mortgages subject to the non-recourse funding and does not intend to do so. During the term of the transactions, any amounts realised from the portfolios in excess of that due to the providers of the funding, less any related administrative costs, will be paid to Irish Life & Permanent plc. The providers of this funding have agreed in writing (subject to the customary warranties and covenants) that they will seek repayment of the finance, as to both principal and interest, only to the extent that sufficient funds are generated by the mortgages and related security, and that they will not seek recourse in any other form. Debt securities in issue to subsidiaries At 31 December 2009, the group had 77m of securities issued to Irish Life Assurance plc and the company held 2,008m of non-recourse funding from its subsidiaries. Profit on repurchase of debt securities in issue During the, the group repurchased 53m and 10m of medium term non-recourse notes in issue at discounts of 7% to 34% for the securities outlined below. This repurchase of debt is accounted for under IAS 39 and met the requirements to be treated as an extinguishment of the original instruments. It resulted in a total profit of 8m ( 7m after taxation) being recognised in the investment return as detailed in Note 43 Investment return. The carrying value of each instrument repurchased and the consideration given including costs to arrive at the profit are set out below: Instrument exchange Percentage Nominal Carrying repurchased value value % m m EMTN Tranche Auburn 5 A Fastnet 2 A Total Repurchase consideration given including costs m Consideration 57 Costs - Total repurchase consideration including costs 57 Profit 8 132

133 Notes to the Group Financial Statements 23. Investment contract liabilities 31 December December 2008 Gross Reinsurance Net Gross Reinsurance Net m m m m m m Unit-linked liabilities 23,434 (91) 23,343 20,311 (144) 20,167 Non-linked and guaranteed tracker liabilities Investment financial options and guarantees Non-controlling share of unit trust ,032 (91) 23,941 21,118 (144) 20,974 The non-controlling share of unit trust refers to the portion of unit trusts consolidated in the financial statements which are not attributable to Irish Life Assurance policyholders. The trusts are consolidated as Irish Life Assurance is deemed by its percentage holdings to have a controlling interest. The change in liabilities during 2009 is analysed as follows: 2009 Gross Reinsurance Net m m m As at 1 January 21,118 (144) 20,974 Premiums 3,358 (1) 3,357 Claims (2,869) 88 (2,781) Fees deducted (174) - (174) Exchange movements Change in investment contract liabilities 2,666 (34) 2,632 Non-controlling interest - Change in investment contract liabilities (148) - (148) - Investment by non-controlling interest in unit trust As at 31 December 24,032 (91) 23,941 The change in liabilities during 2008 is analysed as follows: 2008 Gross Reinsurance Net m m m As at 1 January 27,574 (280) 27,294 Premiums 4,313 (1) 4,312 Claims (2,813) 71 (2,742) Fees deducted (206) - (206) Exchange movements (63) - (63) Change in investment contract liabilities (7,695) 66 (7,629) Non-controlling interest - Change in investment contract liabilities (27) - (27) - Investment by non-controlling interest in unit trust As at 31 December 21,118 (144) 20,974 Overview Business Review Corporate Governance Financial Statements 133

134 Notes to the Group Financial Statements 24. Life insurance contracts including life insurance contracts with discretionary participation features (DPF) (a) Analysis of insurance contract liabilities 31 December December 2008 Gross Reinsurance Net Gross Reinsurance Net m m m m m m Unit-linked liabilities (1) 561 Non-linked liabilities - without discretionary participation features 3,391 (1,829) 1,562 3,370 (1,931) 1,439 - with discretionary participation features ,034 (1,829) 2,205 4,007 (1,932) 2,075 The change in liabilities during 2009 is analysed as follows: 2009 Gross Reinsurance Net m m m As at 1 January 4,007 (1,932) 2,075 Premiums 709 (116) 593 Claims (489) 160 (329) Expected return on insurance contract liabilities 100 (59) 41 Return debited to policyholders Fees deducted (317) 67 (250) Change in economic assumptions (33) 15 (18) Change in operating assumptions (35) 36 1 Exchange differences 6-6 Other (10) - (10) As at 31 December 4,034 (1,829) 2,205 The change in liabilities during 2008 is analysed as follows: 2008 Gross Reinsurance Net m m m As at 1 January 4,010 (1,701) 2,309 Premiums 669 (228) 441 Claims (466) 152 (314) Expected return on insurance contract liabilities 127 (73) 54 Return credited to policyholders (243) - (243) Fees deducted (230) (7) (237) Change in economic assumptions 392 (289) 103 Change in operating assumptions (224) 214 (10) Exchange differences (30) - (30) Other 2-2 As at 31 December 4,007 (1,932) 2,075 (b) Assumptions The liabilities for insurance contracts are calculated in accordance with insurance regulations in force in Ireland. Liabilities for unit-linked insurance contracts include amounts reflecting the value of the underlying funds in which the policy is invested. 134

135 Notes to the Group Financial Statements 24. Life insurance contracts including life insurance contracts with discretionary participation features (DPF) (continued) Liabilities are calculated using either the net or the gross premium method. In calculating the appropriate liability for non-linked insurance liabilities including the closed book of business with discretionary participation features, it is necessary to make assumptions on a range of items. The assumptions which have the most significant impact on the measurement of liabilities are: - Interest rates - Mortality and morbidity - Expenses. The interest rates gross of tax used are as follows: Regular premium business - No DPF 2.70% to 3.98% 3.56% to 3.98% - With DPF 2.11% to 2.53% 2.33% to 2.79% Single premium business 1.12% to 5.47% 2.70% to 3.66% Mortality and morbidity assumptions are based on the standard industry published tables amended where appropriate to reflect the group s current experience and to allow for expected improvements or disimprovements in mortality. The tables used for 2009 and 2008 are as follows: Lives assured - Non-linked 55%-90% AM / AF00 select 70%-75% AM / AF92 ultimate - Linked 100% AM / AF00 ultimate 90% AM / AF92 ultimate Annuities - Males 104% PNMA00 100% PMA 92 (c=2003) - Females 104% PNFA00 100% PFA 92 (c=2003) - Future mortality rates to improve on medium cohorts basis with minimum improvement of 1.50% p.a. 1.50% p.a. Disability rates - Inception: Males 105%-320% CMIR (12) 105%-320% CMIR (12) - Inception: Females 210%-640% CMIR (12) 210%-640% CMIR (12) - Termination 25%-160% CIDA rates 25%-160% CIDA rates Serious illness rates - Smokers 163% of IC94 with 3% p.a. 163% of IC94 with 3% p.a. future deterioration future deterioration - Non-smokers 100% of IC94 with 3% p.a. 100% of IC94 with 3% p.a. future deterioration future deterioration Expense assumptions are based on the current year expenses and size of book. Expense inflation assumption is 3.0% (2008: 3.0%). (c) Changes in assumptions The principal changes in assumptions since 31 December 2008 were: - Interest rates used were changed to reflect the actual market interest rates at 31 December This reduced liabilities by 24m after allowing for reinsurance, however, this is largely offset by movement in matching assets reflecting the group s policy of matching assets and liabilities where possible. Overview Business Review Corporate Governance Financial Statements 135

136 Notes to the Group Financial Statements 24. Life insurance contracts including life insurance contracts with discretionary participation features (DPF) (continued) - The benefit inflation assumption was increased to reflect a rise in inflation which increased liabilities by 6m after allowing for reinsurance. - Morbidity rates were changed to reflect the latest experience which increased liabilities by 9m after allowing for reinsurance. - Annuitant mortality rates were changed which increased liabilities by 1m after allowing for reinsurance. Life assurance mortality rates were changed which reduced liabilities by 4m after allowing for reinsurance. - Expense assumptions were changed to reflect current unit costs which reduced liabilities by 5m after allowing for reinsurance. (d) Sensitivities The following indicates the sensitivities of insurance liabilities to changes in the assumptions: - 1% decrease in interest rates would increase liabilities by 178m after allowing for reinsurance; - 1% increase in interest rates would decrease liabilities by 142m after allowing for reinsurance; - 10% decrease in maintenance expenses would decrease liabilities by 12m after allowing for reinsurance; and - 5% decrease in both mortality and morbidity rates would decrease liabilities by 16m after allowing for reinsurance. The above are based on a change in one assumption while holding all other assumptions constant. In practice this is unlikely to occur and changes in assumptions may be correlated while the effect of changes in interest rates would be linked to equivalent changes in the value of corresponding assets. 25. Financial options and guarantees The main options and guarantees for which financial options and guarantees ( FOG ) costs have been determined are: (a) Investment guarantees on certain unit-linked funds, where the unit returns to policyholders are smoothed subject to a minimum guaranteed return (in the majority of cases the minimum guaranteed change in unit price is 0%, usually representing a minimum return of the original premium). An additional management charge is levied on policyholders investing in these funds, compared to similar unit-linked funds without this investment guarantee. This extra charge is allowed for in calculating the FOG cost. (b) Guaranteed annuity rates on a small number of products. (c) Return of premium death guarantees on certain unit-linked single premium products. (d) Guaranteed benefits for policies in the closed with-profit fund. The cost of these FOGs are calculated using stochastic models. There are two elements to the cost: - The time value, which is required where a financial option exists which is exercisable at the discretion of the policyholder. The time value of an option reflects the additional value inherent in the option due to the potential for the option to increase in value prior to its expiry date, usually due to movements in the market value of assets; and - The intrinsic value, which is the value based on market conditions at the date of the valuation. 136

137 Notes to the Group Financial Statements 25. Financial options and guarantees (continued) Where a FOG relates to a contract classed as an investment contract, the investment contract liability includes both the time value and the intrinsic value. In accordance with EEV principles where FOGs are part of an insurance contract, allowance is made for the intrinsic value of FOGs in the insurance contract liabilities and an explicit deduction is made to the shareholder value of in-force asset for the time value. The time value of FOGs is calculated using stochastic models. The supplementary EV information in Note 12 EV assumptions sets out the detailed assumptions used to calculate the cost. 26. Other liabilities and provisions (a) Other liabilities Group m m Amounts falling due within one year PAYE and social insurance 18 7 Other taxation 4 8 Investment trading balances 4 4 Other payables Premiums on deposit Bank overdraft Amounts falling due after one year Other payables* *Other payables falling due after one year include the outstanding consideration due on the purchase of a brokerage subsidiary. Company m m Amounts falling due within one year PAYE and social insurance 7 4 Other payables Amounts due to subsidiary undertaking (b) Provisions Group 2009 Staff restructuring Onerous cost contracts Other Total m m m m As at 1 January* Provisions made during the year Provisions used during the year (25) - (35) (60) As at 31 December Overview Business Review Corporate Governance Financial Statements 137

138 Notes to the Group Financial Statements 26. Other liabilities and provisions (continued) Company 2009 Staff restructuring Onerous cost contracts Other Total m m m m As at 1 January* Provisions made during the year Provisions used during the year (6) - (35) (41) As at 31 December *Provisions were previously included with other liabilities in the statement of financial position. Other liabilities for 2008 have been reclassified to show provisions separately. Staff restructuring costs Staff restructuring costs include provisions for employees on career breaks, voluntary severance schemes and voluntary early retirement. Onerous contracts Irish Life Assurance plc has an onerous contract in respect of an investment property where the market value has reduced. Subsequently, a provision has been recognised resulting in a negative investment return of 33m (Note 43 Investment return). Other The other provision is in relation to outstanding settlements on certain closed derivative contracts. 27. Deferred front end fees m m As at 1 January Arising in the year Credit to income arising in the year (32) (36) As at 31 December

139 Notes to the Group Financial Statements 28. Deferred taxation Group Deferred tax assets and liabilities are attributable to the following: 2009 As at Recognised Recognised As at 1 Jan in income in equity Acquired 31 Dec m m m m m Property and equipment 12 8 (8) - 12 Deferred acquisition costs (10) (10) Deferred front end fees (1) (1) Shareholder value of in-force business Investment contract liabilities 1 (3) - - (2) Undistributed life business surpluses Unrealised gains on assets (3) (1) 7-3 Retirement benefits (9) (9) IFRS / FRS transition spreading - (1) - - (1) Losses carried forward - (38) - - (38) Other temporary differences (2) (1) As at Recognised Recognised As at 1 Jan in income in equity Acquired 31 Dec m m m m m Property and equipment 48 (4) (32) - 12 Deferred acquisition costs (8) (2) - - (10) Deferred front end fees (1) (1) Shareholder value of in-force business Investment contract liabilities Undistributed life business surpluses 46 (3) Unrealised gains on assets (1) 2 (4) - (3) Retirement benefits (10) (9) IFRS / FRS transition spreading 1 (1) Losses carried forward (3) 4 - (1) - Other temporary differences 1 (3) - - (2) (36) (1) 130 Company Deferred tax assets and liabilities are attributable to the following: 2009 As at Recognised Recognised As at 1 Jan in income in equity 31 Dec m m m m Property and equipment 8 2 (2) 8 Unrealised gains on assets (6) Retirement benefits (17) 1 - (16) IFRS / FRS transition spreading 2 (3) - (1) Other temporary differences (2) 7-5 Losses carried forward - (28) - (28) (15) (21) 5 (31) Overview Business Review Corporate Governance Financial Statements 139

140 Notes to the Group Financial Statements 28. Deferred taxation (continued) 2008 As at Recognised Recognised As at 1 Jan in income in equity 31 Dec m m m m Property and equipment 41 (15) (18) 8 Unrealised gains on assets (6) 4 (4) (6) Retirement benefits (18) 1 - (17) IFRS / FRS transition spreading 5 (3) - 2 Other temporary differences (1) (1) - (2) 21 (14) (22) (15) 29. Subordinated liabilities Dated Issued by Irish Life & Permanent plc Group Company m m m m 18m floating-rate notes 2011* m 6.25% fixed rate notes m floating-rate step-up callable notes m floating-rate step-up callable notes m floating-rate step-up callable notes m floating-rate step-up callable notes m floating-rate step-up callable notes m 4.625% fixed step-up callable notes m floating-rate step-up callable notes m step-up callable notes m floating-rate step-up callable notes m constant maturity swap notes 2018* m constant maturity swap notes 2018* m 8.76% non-callable lower tier 2 capital notes due m floating-rate notes 2023* m 4.31% fixed-rate callable notes ,117 1,111 1,117 1,111 Undated Issued by Irish Life & Permanent plc JPY 7bln 3.98% undated step-up notes JPY 10bln 3.75% undated step-up notes JPY 20bln 4.655% undated step-up notes Issued by Irish Life Assurance plc 200m 5.25% step-up perpetual capital notes ,644 1,699 1,432 1,492 * These loans contain embedded derivatives which have been separated out and disclosed in Note 7 Derivative instruments as they are not closely related to the host debt instrument. The 10yr notes are linked to 30yr swap rates. 140 Of the above total for subordinated liabilities, 1,167m (2008: 1,230m) is classified as Tier 2 capital.

141 Notes to the Group Financial Statements 29. Subordinated liabilities (continued) The consent of the Financial Regulator is required before: - any repayment, for whatever reason, of a dated subordinated liability prior to its stated maturity; and - any exercise of any redemption option in any undated liability. In the event of the winding up of the entity which issued the subordinated liability the claims of the holders of the subordinated liabilities shall be subordinated to the claims of depositors, policyholders and creditors of the relevant entity other than creditors whose claims are expressed to rank pari passu with, or junior, to the claims of the holders of the subordinated liabilities. Dates above for callable notes represent the final maturity dates, notes are callable by Irish Life & Permanent plc at dates prior to final maturity. The terms and conditions of the subordinated liabilities are detailed below: Irish Life & Permanent plc - 18m notes repayable on 30 August Coupon payments are calculated by reference to 20 year forward fixed swap rates versus 6-month Euribor rates, reset every six months on the coupon payment dates, and paid bi-annually in February and August of each year m notes repayable on 15 February The coupon interest rate is fixed at 6.25% and is payable annually in arrears in February. - 10m step-up callable notes due on 10 August 2015 and callable after 5 years on 10 August 2010, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % until August 2010 after which the interest rate becomes 3-month Euribor % until maturity in August The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - 50m step-up callable notes due on 10 August 2015 and callable after 5 years on 10 August 2010, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % until August 2010 after which the interest rate becomes 3-month Euribor % until maturity in August 2015 and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator m step-up callable notes due on 7 December 2015 and callable after 5 years on 7 December 2010, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % until December 2010 after which the interest rate becomes 3-month Euribor % until maturity in December 2015 and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - 50m step-up callable notes repayable on 7 November 2016 and callable after 5 years on 7 November 2011, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % until November 2011 after which the interest rate becomes 3-month Euribor % until maturity in November 2016 and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - 75m step-up callable notes repayable on 24 April 2017 and callable after 5 years on 24 April 2012, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % until April 2012 after which the interest rate becomes 3-month Euribor % until maturity in April 2017, and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator m step-up callable notes repayable on 9 May 2017 and callable after 5 years on 9 May 2012, and annually on the coupon date thereafter. The coupon interest rate is 4.625% paid annually until May 2012 after which the coupon interest rate steps up by 0.50% and is re-set to a floating rate set at 3-month Euribor % and payable annually in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - 45m step-up callable notes repayable on 25 June 2018 and callable after 5 years on 25 June 2013, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % paid quarterly until June 2013 after which the interest rate becomes 3-month Euribor %, and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. 141 Overview Business Review Corporate Governance Financial Statements

142 Notes to the Group Financial Statements 29. Subordinated liabilities (continued) - 25m step-up callable notes repayable on 18 June 2018 and callable after 5 years on 18 June 2013, and on the coupon date thereafter. The coupon interest rate is fixed for the first 5 years at 8.25%, payable semi-annually up until June From then on, if not called, the coupon interest rate switches to a floating rate based on 3 month Euribor %, payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - 20m step-up callable notes repayable on 25 June 2018 and callable after 5 years on 25 June 2013, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor % until June 2013 after which the interest rate becomes 3-month Euribor %, payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - 5m constant maturity swap notes repayable on 20 June The coupon interest rate is 9.75% to June 2011 and thereafter is referenced to 30 year Euro swap rates, subject to a maximum rate of 8%, all payable annually. - 5m constant maturity swap notes repayable on 25 June The coupon interest rate is referenced to 30 year Euro swap rates, subject to a minimum rate of 6.55% payable annually. - 55m non-callable lower tier 2 capital notes repayable on 15 September 2018, issued at % of aggregate nominal amount of 54.56m. The notes carry a rate of return of 8.76% on a zero coupon basis. - 10m constant maturity swap notes repayable on 21 March The coupon interest rate is referenced to 20 year Euro swap rates, subject to a maximum rate of 6.50% payable annually in arrears. - 10m notes repayable on 28 November 2035 and callable by the issuer in whole after 5 years on 28 November 2010 and every five years thereafter. The coupon interest rate is fixed at 4.31% payable annually. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - JPY 7bln undated step-up subordinated loans. The coupon interest rate is fixed at USD 3.98% until 18 October 2035 payable annually, thereafter the interest rate becomes 12 month JPY Libor %, also payable annually. The issuer retains the option to redeem the loan at the step-up date in October 2035 and at every interest payment date thereafter. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - JPY 10bln undated step-up subordinated loans. The coupon interest rate is fixed at USD 3.75% until 25 February 2035 payable annually in arrears, thereafter the interest rate becomes 12 month JPY Libor %, also payable annually in arrears. The issuer retains the option to redeem the loan at the step-up date in October 2035 and at every interest payment date thereafter. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. - JPY 20bln undated step-up loans. The coupon interest rate is fixed at USD 4.655% until 23 August 2034, payable annually in arrears, thereafter the interest rate becomes 12 month JPY Libor %, also payable annually in arrears. The issuer retains the option to redeem the loan at the step-up date in August 2034 and at every interest payment date thereafter. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. Irish Life Assurance plc - 200m step-up perpetual capital notes. The interest rate is fixed at 5.25% for 10 years until 8 February 2017 ("the first reset date"). On the first reset date the interest rate becomes Euribor %. The note is callable in whole at the first reset date and each coupon payment thereafter. The notes may also be redeemed if they no longer qualify as eligible regulatory capital. 142

143 Notes to the Group Financial Statements 30. Shareholders' equity Share capital Share capital is the funds raised as a result of a share issue and comprises the ordinary shares of the company. Share premium The share premium reserve represents the excess of amounts received for share issues over the par value of those shares for the group and the company. Revaluation reserve The revaluation reserve comprises the unrealised gain or loss, net of tax, on the revaluation of owner occupied properties. This is a non-distributable reserve. Available-for-sale reserve The available for sale reserve comprises unrealised gains or losses, net of tax on available-for-sale financial assets which have been recognised at fair value on the statement of financial position. Currency translation adjustment reserve The currency translation adjustment reserve represents the cumulative gains and losses, net of hedging on the retranslation of the group's net investment in foreign operations, at the rate of exchange at the statement of financial position date. Share-based payments reserve This reserve comprises the cost of share options and the long-term incentive plan, which have been charged to the income statement over the vesting period of the options. Other capital reserves Other capital reserves include the share premium 21m of Irish Life plc at the date of the merger and the 7m capital redemption reserve arising from the repurchase and cancellation of shares. It also includes the merger reserve which is the difference between the shares issued by Irish Permanent plc and the nominal value of the issued share capital of Irish Life plc on the merger of the companies and amounts to a deficit of 2,719m. The share premium arising on the shares ( 2,698m) issued in connection with the merger has been classified with the merger reserve rather than with the other share premium in existence in the company. Own share reserve Own shares held (excluding shares held for the long-term incentive plan) are held within the group's life operations for the benefit of life assurance policyholders. In accordance with IFRS the cost of these shares, 66m (2008: 86m), is deducted from distributable reserves. The liability to policyholder is based on the fair value of the shares and the change in liability due to the mark to market of the shares is transferred from retained earnings to non-distributable reserves. Retained earnings The group retained earnings include distributable and non-distributable earnings. These reserves represent the retained earnings of the company, subsidiaries and associate after consolidation adjustments. In respect of the company statement of financial position, retained earnings represent the cumulative revenue reserves of that company. Overview Business Review Corporate Governance Financial Statements 143

144 Notes to the Group Financial Statements 31. Non-controlling interest m m Non-controlling interest in subsidiary Opening balance 1 13 Total comprehensive income - 3 Acquisition of non-controlling interest (1) (15) Closing balance Authorised and issued share capital Authorised share capital as at 31 December: Share Capital Share Capital Number of Shares m m Ordinary Shares of 32-cent each 400,000, Preference Shares 300,000, US$ Preference Shares 200,000, Stg Preference Shares 100,000, The company has only one class of issued shares and as at 31 December 2009, it had 276,782,351 (2008: 276,782,351) ordinary shares in issue in that class. Each ordinary share carries one vote except for shares held for the benefit of life assurance policyholders, which pursuant to section 9(1) of the Insurance Act 1990, do not have voting rights. The number of ordinary 32 cent fully paid up shares is as follows: As at 1 January 276,782, ,017,990 Issued during the year - 764,361 As at 31 December 276,782, ,782,351 Own shares held for the benefit of life assurance policyholders 7,108,182 8,870,331 Shares held under employee benefit trust 457, ,914 No shares were issued in 2009 as a result of the exercise of options under the group's share option schemes. There were no shares issued to the group profit-sharing scheme in Shares issued during 2008 included 736,226 shares issued to the group profit sharing scheme and 28,135 shares issued as a result of the exercise of options under the group's share option schemes. Own shares held for the benefit of life assurance policyholders are held by Irish Life Assurance plc and represent 2.6% (2008: 3.2%) of the issued share capital of the company. There were no acquisitions of treasury shares during the period (2008: nil) in anticipation of share awards that may vest under the long-term incentive plan for senior management. 144

145 Notes to the Group Financial Statements 33. Analysis of equity and capital A. Shareholders equity The group's equity is analysed as follows: m m Banking - Ireland Net assets Banking - UK Net assets Life assurance Net assets 1,154 1,217 Goodwill 5 5 Deduction in respect of liability relating to own shares held for the benefit of life assurance policyholders (23) (14) 1,136 1,208 Fund Management Net assets Brokerage and third party administration Net assets Goodwill Associated undertaking Consolidation adjustment (note 3) (21) (11) Equity excluding non-controlling interest 2,006 2,347 Non-controlling interest - 1 Shareholders' equity including non-controlling interest 2,006 2,348 B. Capital management The group is regulated by the Irish Financial Services Regulatory Authority ( Financial Regulator or FR ) which sets and monitors regulatory capital requirements in respect of the group s operations. While there are a number of regulated entities within the group which have individual regulatory capital requirements the two principal regulated entities are Irish Life & Permanent plc ( IL&P ), the group s holding company at 31 December 2009 which is also the group s banking operation (trading as permanent tsb), and Irish Life Assurance plc ( ILA ) the group s principal life assurance operation. The group s policy is to manage the capital base so as to meet all regulatory requirements while maintaining investor, creditor and market confidence and ensuring that there is adequate capital to support future growth in the business. In addition, the relationship between the level and composition of regulatory capital and the shareholders return on capital is monitored to ensure that there is an appropriate balance between equity and debt capital within the overall regulatory capital held. Overview Business Review Corporate Governance Financial Statements 145

146 Notes to the Group Financial Statements 33. Analysis of equity and capital (continued) The management of capital within the group is monitored by the Board Risk and Compliance Committee, the Banking Assets and Liabilities Committee and the Life Assurance Assets and Liabilities Committee in accordance with board approved policy. In general, outside of IL&P, all regulated entities within the group operate to an internal target level of capital which provides a margin of comfort above the regulatory minimum with any excess capital above this target level being remitted to IL&P. Banking operations From 1 January 2008 the minimum regulatory capital requirement of the group s banking operations has been calculated in accordance with the provisions of Basel II as implemented by the European Capital Requirements Directive and the Irish Financial Regulator. The objective of Basel II is to more closely align bank regulatory capital with the economic capital required to support the risks being undertaken. The capital required to cover credit, operational and market risks is required to be explicitly measured under the Basel II methodology. In implementing Basel II, the group has adopted the Internal Ratings Based ( IRB ) approach to credit risk and was awarded IRB accreditation in late Under the IRB approach, the bank uses internally generated risk models to compute the capital required to support credit risk by calculating the probability of default and the loss given default in all of its various portfolio exposures. The models and calculations are conservatively based. With regard to operational risk, the group has adopted the standardised approach under which all operational risks are methodically identified together with the probability and magnitude of any loss which might arise from such risks, taking into account any mitigating factors and controls. Value at risk, an industry-wide standard, is the methodology which the group has adopted in regard to the measurement of market risk. For regulatory capital purposes in respect of market risk the group utilises the standardised approach. The value at risk methodology is discussed in further detail in Note 34 Financial risk management. The following table summarises the composition of regulatory capital and the ratios of the group for the years ended 31 December 2009 and They are calculated in accordance with Basel II regulatory capital requirements. 146

147 Notes to the Group Financial Statements 33. Analysis of equity and capital (continued) m m Tier 1 capital Share capital and share premium 2,922 2,922 Reserves 951 1,164 Prudential filters Total qualifying Tier 1 capital 3,938 4,174 Tier 2 capital Subordinated liabilities 1,167 1,230 Revaluation reserve 8 58 Other Total qualifying Tier 2 capital 1,200 1,311 Total qualifying Tier 1 and Tier 2 capital 5,138 5,485 Deductions Investment in life operations (3,187) (3,229) Other (93) (197) Total deductions (3,280) (3,426) Total own funds 1,858 2,059 Required capital 1,313 1,454 Application of ICR (23%) Total required capital 1,615 1,788 Excess of total own funds over total required capital Non-audited information Total risk-weighted assets before ICR* 16,411 18,173 Total risk-weighted assets after ICR 20,185 22,353 Risk asset ratio (all Core Tier 1) Before the application of the ICR 11.3% 11.3% After the application of the ICR 9.2% 9.2% * Interim capital requirement ("ICR"): The Pillar II capital requirement under Basel II has yet to be determined. In the meantime an interim capital requirement is applied equal to 23% of Pillar I risk-weighted assets. The above ratio is calculated and reported to the Financial Regulator on a quarterly basis. The percentage of capital is in excess of the regulatory minimum of 8% plus ICR. The movement in the bank s regulatory capital is summarised below: m m As at 1 January 2,059 2,029 Bank earnings after tax and corporate costs (262) 23 Dividends received Interim dividends - (62) Other 19 (40) As at 31 December 1,858 2,059 Overview Business Review Corporate Governance Financial Statements 147

148 Notes to the Group Financial Statements 33. Analysis of equity and capital (continued) Life operations The regulatory capital requirements of the life assurance business are determined according to the European Communities (Life Assurance) Framework Regulations 1994 modified by the EU directive 2002/83/EC. The regulations set down the approach to be used to value the assets and liabilities and the calculation of the required solvency margin m m Total shareholders funds attributable to life business 1,144 1,218 Less: Shareholder value of in-force business - Gross (730) (787) Related deferred tax Shareholders funds excluding VIF Adjustments to valuation of assets and liabilities to regulatory basis (78) (65) Subordinated liabilities Other assets available to cover solvency margin Regulatory capital on continuing activities Held within the long-term business fund Held outside the long-term business fund The solvency cover for Irish Life Assurance plc, the group s main life assurance operation, is 1.6 (2008: 1.6) times the minimum requirement of 416m at 31 December 2009 (2008: 410m). The level of required capital should be at least the level of solvency capital at which the local supervisory authority is empowered to take action and any further amount that may be encumbered by local supervisory restrictions. In light of this the directors have set the level of required capital at 150% of the minimum requirement. The directors consider this to be a conservative level of capital to manage the business having regard for the basis of calculating liabilities and the insurance and operational risks inherent in the underlying products. At 31 December each of the group s entities has sufficient capital on a stand-alone basis and therefore no capital injections were expected to be needed in the future. Transfers of capital out of the life companies are subject to the companies continuing to meet the regulatory capital requirements. Shareholder capital is invested in cash, short-term debt securities and property. The group has provided for the cost of financial options and guarantees on a market-consistent basis, details of which, together with the process of setting other assumptions, are included in Note 25 Financial options and guarantees. Capital is affected by a range of factors including interest rates, mortality and morbidity. The group s capital management and risk management policies are discussed in Note 34 Financial risk management. In November 2008 a stop loss reinsurance treaty in relation to new business was signed with Swiss Re. The effect on regulatory assets for 12 months to December 2009 was 22m (December 2008: 125m) and is shown in the analysis below as a reduction in new business strain of 44m (December 2008: 59m), expected return of negative 34m (December 2008: nil) and an experience variance of 12m (December 2008: 66m). The accounting treatment in the IFRS accounts of this stop loss reinsurance treaty is not to show either the contingent asset or contingent liability on the statement of financial position as they offset each other but the reassurance fee of 2.6m (December 2008: 0.2m) for this treaty is accounted for in the IFRS consolidated income statement. 148

149 Notes to the Group Financial Statements 33. Analysis of equity and capital (continued) This table analyses the change in regulatory capital of the life operations on continuing activities (net of tax): m m Regulatory capital as at 1 January Capital generated from existing business - Expected return Experience variances Operating assumption changes 9 22 New business strain (74) (88) Expected investment return Short-term investment fluctuations - Direct shareholder property short-term investment fluctuations (56) (112) - Property commitment cost (29) - - Other short-term investment fluctuations (24) (141) Effect of economic assumption changes 3 25 Other (9) (16) Change in inadmissible assets (4) 2 Dividends (13) (15) Subordinated liabilities 3 12 Regulatory capital as at 31 December Best estimate assumptions are used to analyse the various components of the capital movements which are explained as follows: Capital generated on existing business which has three components: - Expected return: the capital which would arise if the existing business behaved in line with the EV assumptions; - Experience variances: the capital arising because actual experience in the year differs from the EV assumptions on mortality, morbidity, persistency, expenses and non-linked matching; and - Operating assumption changes: the effect on capital of changes to regulatory liability demographic and expense assumptions. These assumptions are reviewed regularly and are changed where appropriate in light of either current or expected experience. New business strain: when a life assurance contract is written significant acquisition costs are normally incurred up-front, these costs are then recovered through future charges. This up-front payment gives rise to a reduction in capital. Expected investment return: capital generated by the expected investment earnings on the net assets attributable to shareholders using the equity and property investment return EV assumptions applicable at the start of the financial year. The expected investment earnings allows for interest payable on subordinated debt and the fee payable in relation to the stop loss reinsurance treaty. Short-term investment fluctuations: this is the effect on capital of the difference between the actual investment return achieved and the long-term investment return assumed for both policyholder and shareholder assets. Effect of economic assumption changes: this is the impact on capital of changes in economic assumptions excluding changes in non-linked regulatory liability interest assumptions. Overview Business Review Corporate Governance Financial Statements 149

150 Notes to the Group Financial Statements 34. Financial risk management The group risk identification and assessment process identifies the following risks as being material to the operations of Irish Life & Permanent plc. Credit Risk Liquidity Risk Market Risk Insurance Risk Operational Risk. The group s approach to management of these risks is set out in the following pages. Risk management framework The Board of Directors approves overall policy in relation to the types and levels of risk that the group is permitted to assume in the implementation of its strategic and business plans. The Board Risk and Compliance Committee has responsibility for oversight and advice to the board on risk governance, the current risk exposures of the group and future risk strategy, including strategy for capital and liquidity management, and the embedding and maintenance throughout the group of a supportive culture in relation to the management of risk. The Board Risk and Compliance Committee supports the board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the group's strategy is consistent with the group's risk appetite. The Board Risk and Compliance Committee is responsible for monitoring adherence to the group risk appetite statement. Where exposures exceed levels established in the appetite statement, the Board Risk and Compliance Committee is responsible for developing appropriate responses. This is facilitated by the periodic review of a key risk indicators report calibrated to the risk appetite statement. The Board Risk and Compliance Committee, in turn, delegates responsibility for the monitoring and management of specific risks to committees accountable to it. These committees are the Group Credit Committee, the Banking Assets and Liabilities Committee, the Life Assurance Assets and Liabilities Committee, the Group Operational Risk Committee, the Group Counterparty Credit and Market Risk Committee and the Group Compliance Committee. The terms of reference for each committee, whose members include members of group senior management, are reviewed regularly by the Board Risk and Compliance Committee. Credit risk Credit risk is defined as the current or prospective risk to earnings and capital arising from an obligor s failure to meet the terms of any contract with the group or its failure to perform as agreed. The group maintains detailed credit policies for each business unit which outlines relevant conditions under which a loan can be made. Credit policies establish coherent limit systems for credit risk. The various limit structures in place create a credit risk ceiling. Limit structures are in place to manage credit default risk, concentration risk, settlement risk and counterparty risk, as described below. For Irish Life & Permanent plc this risk can be further sub-categorised into: Credit Default Risk Concentration Risk Securitisation Risk Settlement Risk Reinsurance Counterparty Risk. 150

151 Notes to the Group Financial Statements 34. Financial risk management (continued) Credit Default Risk - The potential for loss occasioned by the counterparty s insolvency or lack of willingness to pay. A robust management process is in place to ensure that credit risk taken on is in line with group risk appetite and that effective credit risk measurement takes place across the group. A core part of the tools used in the management of credit risk is the calculation of obligor level probability of default ( PD ) and portfolio level loss given default ( LGD ) under the Basel II Internal Ratings Based ( IRB ) approach. The PD is a measure of the likelihood of a specific obligor defaulting within the next twelve months. Where an obligor is: a) More than 90 days in arrears; and / or b) Expected to default on obligations due to known financial difficulties or other rationale, the allocated PD for the obligor is 1, indicating a 100% probability of default. Both PD and LGD are calculated using internally developed models and give a statistical view of the risk profile of the lending portfolios and individual accounts. The Group Credit Committee reviews the lending portfolio statistical profiles on a regular basis. Calculation tools generate the measures of credit risk through statistically based scoring mechanisms. Scorecard systems at account application and at subsequent points in the life of the account (using a combination of application and behavioural scorecards) are used to assess the risk inherent in new credit applications and for existing customers. The statistical scorecards differ across lending portfolio classification and product type. Scorecards incorporate expert lender judgement where relevant. Individual accounts and applications are allocated a credit risk score from a graded scale, which distributes the loans according to their propensity to default. Underwriting authorities in place cascade down from the Credit Committee to individual business units and credit officers. For wholesale credit applications (and ongoing assessment), the PD for a counterparty is determined using the group s IRB model. As a basis for the IRB credit rating for counterparty, the group uses the lowest credit rating for the counterparty from three separate rating agencies. This credit rating is mapped to a statistical PD before the application of the group s notching process. The notching process increases the counterparty IRB credit rating (and hence PD) according to pre-defined notching parameters. Notching parameters revise the IRB credit rating for a counterparty upwards dependent on factors such as geographical location, presence of the counterparty on rating agency watchlists and economic market stability, amongst others. Credit default risk also arises on non-traded / over-the-counter derivative exposures since the group is exposed to the risk of the counterparty defaulting prior to the maturity of in-the-money products, thereby necessitating replacement of the contract at applicable market rates. To manage this risk, counterparty limits are maintained in the group s investment accounting system, and specialist Risk Management and Compliance teams undertake regular independent monitoring of counterparty exposure against limits. All breaches of counterparty limits are notified to the Banking Assets and Liabilities Committee (Banking ALCO). In the case of some counterparties, to avoid a build-up of exposure on derivatives, the group uses a credit support annex ("CSA"), which is an addendum to the bi-lateral ISDA Agreement with a counterparty, and which requires daily settlement of mark to market values of outstanding derivative deals. Credit default risk represents the most significant element of credit risk for the group. Irish Life & Permanent plc capitalise for credit default risk using the key risk parameters of probability of default ( PD ), loss given default ( LGD ) and exposure at default ( EAD ). These parameters are utilised to calculate expected loss ( EL ) and a standalone unexpected loss figure at a credit risk sub-portfolio level. The stand-alone unexpected loss can then be converted to a sub-portfolio unexpected loss contribution which generates required economic capital. Expected losses should be covered by the normal business operating margins but unexpected losses are by definition rare and of significant impact, necessitating the setting aside of a capital cushion. Overview Business Review Corporate Governance Financial Statements Concentration Risk - The risk that any single (direct and / or indirect) exposure or group of exposures has the potential to produce losses large enough to threaten the institution s health or its ability to maintain its core business. 151

152 Notes to the Group Financial Statements 34. Financial risk management (continued) The group risk appetite statement explicitly outlines limits for lending and non-lending concentration that will be tolerated by the group. The group position against these limits is monitored on a regular basis by the Group Credit Committee, the Board Risk and Compliance Committee and the Board of Directors. The Bank s lending strategy in Ireland is not targeted at any particular geographic locations and should, in the ordinary course, be spread throughout the country proportionately to local economic activity. Securitisation Risk - The risk of loss associated with buying or selling asset-backed securities. Securitisation risk occurs when issuing mortgage-backed securities as a risk transfer or funding device. Securitisation risk is minimised through the use of standard (as opposed to exotic) securitisation structures, the use of only high quality counterparties to perform the structuring, oversight and governance provided by appropriately qualified and experienced external and internal parties. Monitoring of securitisation risk within the group principally occurs through three processes: 1. A review of the mortgage pool to be used in the securitisation including checking the pool is appropriately homogeneous by reference to time in arrears and loan-to-value ("LTV ) amongst other parameters. 2. A review of the internal securitisation process following the execution of a transaction allowing the process to be improved in terms of efficiency and risk reduction. 3. Monthly monitoring of the underlying mortgage pool performance following the transaction. High quality counterparties to securitisation structuring are chosen from a panel of suitable counterparties after consideration of selection parameters such as: Recent securitisation activity and performance; Presence of an ongoing successful relationship with Irish Life & Permanent plc; and Position in relevant industry league tables. Settlement Risk - The risk that the group delivers a sold asset or cash to a counterparty and then does not receive the purchased asset or cash as expected. The group is involved in a limited volume of derivatives contracts trading, and thus this risk is limited in the group context. Robust management controls including established counterparty limits, and a restriction in trading to counterparties with an A+ credit rating or higher from Standard & Poor s, also limit the potential risk. Credit Risk Mitigation The credit policy includes guidelines on the acceptability of specific classes of collateral or risk mitigation. The principal collateral types for loans and receivables are mortgages over residential properties, charges over business assets and guarantees. Estimates of the fair value of collateral are assessed at the time of borrowing and are generally not updated except when a loan is individually assessed as impaired. The group has a concentration of credit risk in retail mortgages which reflects the group s strategic decision to focus on this market. The group makes use of collateral agreements to mitigate exposures to wholesale credit risk. Collateral is obtained on credit risk exposures in line with the group s lending policies and procedures (and the reinsurance strategy in the case of reinsurance counterparty risk). The accepted collateral is also governed by the group s lending policies. Impairment Provisions For individually assessed accounts, loans are treated as impaired as soon as there is objective evidence that an impairment loss has been incurred. The criteria used by the group to determine whether there is such objective evidence includes, but is not limited to: 152

153 Notes to the Group Financial Statements 34. Financial risk management (continued) Known cash flow difficulties experienced by the borrower; Overdue contractual payments of either principal or interest; and Breach of loan covenants or conditions. Account-specific impairment provisions are established by evaluating the total exposure to loss on a case-by-case basis for all individually significant accounts and any other accounts that do not qualify for the collective assessment approach outlined below. To determine the appropriate account-specific impairment provision for all individually significant non-residential mortgages, a discounted cash flow approach using a number of factors is adopted. The factors considered include: The group s aggregate exposure to the customer; The viability of the customer s business model in generating sufficient cash flow to service its debt obligations; The ranking of the group s claim in relation to the customer s other obligations; The realisable value of any security (or other credit risk mitigant) and the likelihood for a successful repossession; The expected distribution available on any liquidation or bankruptcy; and The estimated time to realise the security / collateral. In respect of residential mortgage exposures, the account-specific impairment provision is determined for all accounts greater than six months in arrears using a discounted cash flow approach taking account of a number of factors: The loan exposure; The recent repayment history; The estimated value of the collateral; The cost of realising the collateral; and The estimated time to realise the security / collateral. Accounts over six months in arrears which do not attract a specific provision are included in the collective provisioning approach. Impairment provisions are also established on a collective basis to cover losses which have been incurred but not yet identified on loans subject to individual assessment. These provisions also include impairment provisions calculated for large numbers of loans managed on a portfolio basis (for example, credit cards or motor vehicle financing). Whilst no account-specific indicators of impairment loss have been identified and attributed to specific customers, experience and other observable data indicate that such impairment losses are present in the portfolio as at the date of assessment. The collective impairment provision factors into calculations the historical loss experience in portfolios of similar credit risk characteristics, current economic conditions and account behavioural trends. Credit quality The credit risk ratings employed by the group are designed to highlight exposures requiring management attention. The credit quality of loans is assessed by reference to the group s rating system. The group uses the Basel II 25-point scale for the internal ratings approach ( IRB ) for credit risk. The scale ranges from 1 to 25 where 1 represents the best risk grade or lowest Probability of Default (PD) and 25 represents the defaulted exposures or PD = 100% for credit risk. The internal rating scale or masterscale is not a rating tool but is based on probability of default and is used to aggregate borrowers for comparison and reporting purposes after their rating by the underlying rating tool(s) (models). The internal gradings below incorporate the IRB rating: investment grade (IRB ratings 1 to 7) includes loans and receivables to banks; excellent risk profile (IRB ratings 8 to 16) includes exposures whose general profiles are considered to be of a very low risk nature; satisfactory risk profile (IRB ratings 17 to 21) includes exposures whose general profiles are considered to be of a low to moderate risk nature; fair risk profile (IRB ratings 22 to 24) includes exposures whose general profiles are considered to require some additional monitoring; and defaulted (IRB rating 25) includes exposures that are impaired and unimpaired greater than 90 days past due. Overview Business Review Corporate Governance Financial Statements 153

154 Notes to the Group Financial Statements 34. Financial risk management (continued) Credit risk - Group Maximum exposure to credit risk before collateral held or other credit enhancements: 2009 Total Unit-linked funds* Group exposure m m m Assets Cash and balances with central banks (note 4) 218 (15) 203 Items in course of collection (note 4) Debt securities (note 5) 15,780 (6,329) 9,451 Derivative assets (note 7) 1,169 (858) 311 Loans and receivables to customers (note 8) 38,592-38,592 Loans and receivables to banks (note 10) 4,925 (1,577) 3,348 Reinsurance assets 1,979 (91) 1,888 62,771 (8,870) 53,901 Contingent liabilities and commitments (note 52) ,336 (8,870) 54, Total Unit-Linked Funds* Group Exposure m m m Assets Cash and balances with central banks (note 4) 200 (24) 176 Items in course of collection (note 4) Debt securities (note 5) 10,929 (5,809) 5,120 Derivative assets (note 7) 1,162 (915) 247 Loans and receivables to customers (note 8) 40,075-40,075 Loans and receivables to banks (note 10) 4,775 (1,985) 2,790 Reinsurance assets 2,133 (144) 1,989 59,398 (8,877) 50,521 Contingent liabilities and commitments (note 52) ,076 (8,877) 51,199 * excludes unit-linked tracker funds where an investment guarantee is given by the shareholder. Debt securities The group is exposed to credit risk on third parties where the company holds debt securities (including sovereign debt). Sovereign debt is restricted to countries with a Moody s rating of A- or higher. The group has set counterparty limits for all debts and loans on a group-wide basis. 154

155 Notes to the Group Financial Statements 34. Financial risk management (continued) The following table gives an indication of the level of creditworthiness of the group s debt securities and is based on the ratings prescribed by the rating agency Moody s Investor Services Limited. Debt securities m m Neither past due nor impaired Aaa 3,719 2,558 Aa 4, A 881 1,567 Baa Below Ba 45 - Total 9,451 5,120 Derivative assets m m Rating Aaa - 4 Aa A Baa 1 - Covered by netting agreements Total Loans and receivables to customers Loans and receivables are summarised as follows: Group m m ROI residential mortgages 27,256 27,931 UK residential mortgages 7,484 7,171 Commercial 1,939 1,978 Consumer finance Finance leases 1,213 1,739 Term loans / other Money market funds ,639 39,813 Provision for loan impairment (477) (139) Deferred fees, discounts and fair value adjustments ,592 40,075 Overview Business Review Corporate Governance Financial Statements 155

156 Notes to the Group Financial Statements 34. Financial risk management (continued) 2009 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds m m m m m m Neither past due nor impaired 34,603 24,306 7,158 1,495 1, Past due but not impaired 3,208 2, Impaired Total 38,639 27,256 7,484 1,939 1, ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds m m m m m m Neither past due nor impaired 37,268 26,269 6,786 1,682 2, Past due but not impaired 2,343 1, Impaired Total 39,813 27,931 7,171 1,978 2, Collateral of 739m (2008: 159m) is held against loans and receivables classified as impaired. At 31 December 2009, the group had repossessed collateral of 46m on balances of 57m (2008: 43m collateral on balances of 54m). Repossessed assets are sold as soon as practicable, with proceeds offset against any outstanding indebtednesses. At 31 December 2009, repossessed assets are included within other assets in the statement of financial position. The carrying amount of loans and receivables that would otherwise have been past due or impaired whose terms have been renegotiated is 1,701m (2008: 596m). Loans and receivables to customers neither past due nor impaired balance - Group 2009 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds m m m m m m Excellent risk profile 23,841 18,874 3, Satisfactory risk profile 7,885 3,652 2,617 1, Fair risk profile 2,877 1, Total 34,603 24,306 7,158 1,495 1, ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds m m m m m m Excellent risk profile 27,458 20,856 4, , Satisfactory risk profile 7,567 3,885 2, Fair risk profile 2,243 1, Total 37,268 26,269 6,786 1,682 2,

157 Notes to the Group Financial Statements 34. Financial risk management (continued) Loans and receivables to customers past due but not impaired balances - Group 2009 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds m m m m m m Past due up to 30 days 1, Past due days Past due days Past due more than 90 days 1, Total 3,208 2, ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds m m m m m m Past due up to 30 days Past due days Past due days Past due more than 90 days Total 2,343 1, These are loans and receivables where contractual interest or principal payments are past due but the group believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collections of amounts owed to the group. Loans and receivables to banks Loans and receivables to banks are with investment-grade counterparties. The following table gives an indication of the level of creditworthiness of the group s loans and receivables to banks and is based on the ratings prescribed by the rating agency Moody s Investor Services Limited m m Rating Aaa Aa 1,921 2,088 A 1, Baa Total 3,348 2,790 Overview Business Review Corporate Governance Financial Statements 157

158 Notes to the Group Financial Statements 34. Financial risk management (continued) Reinsurance assets The group s life operations cede insurance and investment risk to a number of reinsurance companies. There are three main categories of reinsurance assets as set out below: m m Assets held in a charged account 1,342 1,277 Assets where credit risk is borne by the policyholder Other assets where credit risk is borne by the shareholder Total 1,979 2,133 The assets held in a charged account are in respect of reinsurance treaties for annuity business, where all withdrawals from the charged account have to be authorised by Irish Life Assurance plc. Assets are managed in accordance with a mandate which matches the assets and liabilities. Assets where credit risk is borne by the policyholders relate to unit-linked investment contracts where the policy documents specify that the return to the policyholder is based on the return from the reinsurance companies. Reinsurance counterparty risk is managed through the group's reinsurance strategy. The reinsurance strategy is established by the Life Assurance Assets and Liabilities Committee and approved by the Irish Life Assurance plc board. The group regularly reviews the financial security of its reinsurance companies. Where the reinsurance arrangement involves asset accumulation on the part of the reinsurance company, these companies have a Moody s rating of at least A. Other limits are set with reference to premium income, assets and shareholder capital of the reinsurance company. The reinsurance assets where the credit risk is borne by the shareholder are broken down by credit rating of the counterparty as follows: m m Rating Aaa - 9 Aa A Total Credit risk - Company Maximum exposure to credit risk before collateral held or other credit enhancements: 2009 Company Exposure m Assets Cash and balances with central banks (note 4) 100 Items in course of collection (note 4) 108 Debt securities (note 5) 12,438 Derivative assets (note 7) 327 Loans and receivables to customers (note 8) 38,165 Loans and receivables to banks (note 10) 2,600 53,738 Contingent liabilities and commitments (note 52) ,

159 Notes to the Group Financial Statements 34. Financial risk management (continued) Maximum exposure to credit risk before collateral held or other credit enhancements: 2008 Company Exposure m Assets Cash and balances with central banks (note 4) 122 Items in course of collection (note 4) 124 Debt securities (note 5) 9,359 Derivative assets (note 7) 253 Loans and receivables to customers (note 8) 39,545 Loans and receivables to banks (note 10) 1,988 51,391 Contingent liabilities and commitments (note 52) ,073 Debt securities The company is exposed to credit risk on third parties where the company holds debt securities (including sovereign debt). Sovereign debt is restricted to countries with a Moody s rating of A- or higher. The group has set counterparty limits for all debts and loans on a group-wide basis. The following table gives an indication of the level of creditworthiness of the company s debt securities and is based on the ratings prescribed by the rating agency Moody s Investor Services Limited. Debt securities Company m m Neither past due nor impaired Aaa 2,395 1,225 Aa 4, A 722 1,393 Baa Below Ba 45 - Issued by subsidiaries 5,031 6,198 Total 12,438 9,359 Derivative assets Company m m Rating Aaa 58 - Aa 4 1 A Baa 1 - Covered by netting agreements Total Overview Business Review Corporate Governance Financial Statements 159

160 Notes to the Group Financial Statements 34. Financial risk management (continued) Loans and receivables to customers Loans and receivables are summarised as follows: Company m m ROI residential mortgages 26,788 27,518 Commercial 1,939 1,977 Consumer finance Term loans / other Subsidiaries 8,618 8,744 Money market funds ,093 39,233 Provision for loan impairment (358) (89) Deferred fees and commission ,165 39, ROI Money Residential Consumer market Total mortgages Commercial finance Subsidiaries funds m m m m m m Neither past due nor impaired 34,690 23,946 1, , Past due but not impaired 2,789 2, Impaired Total 38,093 26,788 1, , ROI Money Residential Consumer market Total mortgages Commercial finance Subsidiaries funds m m m m m m Neither past due nor impaired 37,214 25,897 1, , Past due but not impaired 1,928 1, Impaired Total 39,233 27,518 1, , Collateral of 591m (2008: 43m) is held against loans and receivables classified as impaired. At 31 December 2009 the group had repossessed collateral of 22m on balances of 30m (2008: 19m collateral on balances of 19m). Repossessed assets are sold as soon as practicable, with proceeds offset against any outstanding indebtednesses. At 31 December 2009, repossessed assets are included within other assets in the statement of financial position. The carrying amount of loans and receivables that would otherwise have been past due or impaired whose terms have been renegotiated is 1,365m (2008: 435m). 160

161 Notes to the Group Financial Statements 34. Financial risk management (continued) Loans and receivables to customers neither past due nor impaired balances - Company 2009 ROI Money Residential Consumer market Total mortgages Commercial finance Subsidiaries funds m m m m m m Excellent risk profile 27,723 18, , Satisfactory risk profile 4,931 3,286 1, Fair risk profile 2,036 1, Total 34,690 23,946 1, , ROI Money Residential Consumer market Total mortgages Commercial finance Subsidiaries funds m m m m m m Excellent risk profile 30,391 20, , Satisfactory risk profile 5,002 3, Fair risk profile 1,821 1, Total 37,214 25,897 1, , Loans and receivables to customers past due but not impaired balances - Company 2009 ROI Money Residential Consumer market Total mortgages Commercial finance funds m m m m m Past due up to 30 days 1, Past due days Past due days Past due more than 90 days 1, Total 2,789 2, ROI Money Residential Consumer market Total mortgages Commercial finance funds m m m m m Past due up to 30 days Past due days Past due days Past due more than 90 days Total 1,928 1, These are loans and receivables where contractual interest or principal payments are past due but the group believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collections of amounts owed to the group. Overview Business Review Corporate Governance Financial Statements 161

162 Notes to the Group Financial Statements 34. Financial risk management (continued) Loans and receivables to banks Loans and receivables to banks are with investment-grade counterparties. The following table gives an indication of the level of creditworthiness of the company's loans and receivables to banks and is based on the ratings prescribed by the rating agency Moody s Investor Services Limited: Company m m Rating Aaa Aa 1,916 1,440 A Baa Total 2,600 1,988 Liquidity risk Liquidity risk is the risk that the group may be unable to meet payment of obligations in a timely manner at a reasonable cost or the risk of unexpected increases in the cost of funding the portfolio at appropriate maturities or rates. The Credit Institutions (Financial Support) Scheme 2008 (the Scheme ) and the Credit Institutions (Eligible Liabilities Guarantee) Scheme (the ELG Scheme ) have been critical in providing Irish financial institutions to access funding. During the course of 2009, the group successfully secured term funding of 3bln from international investors under the Scheme for differing durations which expires on 29 September The ELG Scheme, which Irish Life & Permanent plc ("the company") and its subsidiary Irish Permanent (IOM) Limited joined on 4 January 2010, facilitates debt issuance for terms up to five years. These schemes, coupled with improving investor sentiment towards Ireland, enable the group to secure longer term funding, as evidenced by the issuance under the ELG Scheme of a 3-year US $1.75bln bond in January 2010 and a 5-year 2bln bond in March Further issuance under the ELG Scheme will take place over the course of 2010, which will increase the proportion of long- term funding. Without the government guarantee, the cost and availability of funding is influenced by the credit rating allocated to the group by industry rating agencies. A downgrade of the group s credit rating may increase financing costs and restrict market access whilst an upgrade may achieve the reverse. The senior debt credit ratings of Irish Life & Permanent plc at 31 December 2009 were: Moody's Investor Services Limited A2, Standard and Poor's BBB+. Liquidity management for banking operations within the group is carried out by the group s treasury function. In carrying out this responsibility, treasury s principal objective is to ensure that the banking operations have sufficient funding available, at an optimal cost, to meet the operational needs of the bank and to adhere to regulatory and prudential requirements. The liquidity management process includes: - Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replacing funds that mature or are borrowed by customers; - Balance sheet funding, managed by monitoring the funding profile against established target funding levels, with monitoring performed by the Banking Assets and Liabilities Committee; - Maintaining a portfolio of marketable assets that can be easily liquidated as protection against any unforeseen interruption to cash flow; - Monitoring statement of financial position liquidity ratios against internal and regulatory requirements; and - Managing the concentration and profile of debt securities in issue. Irish Life & Permanent plc liquidity policies and protocols establish quantitative rules and targets in relation to measurement and monitoring of liquidity risk. The Banking Assets and Liabilities Committee plays a fundamental role in the monitoring of liquidity risk measures through the monthly review of liquidity reports. 162

163 Notes to the Group Financial Statements 34. Financial risk management (continued) The Banking Assets and Liabilities Committee monitors sources of funding and reviews short-term and long-term borrowings and their respective maturity profiles. The groups funding profile at year end was: % % Customer accounts Long-term debt Short-term debt An analysis of the maturity profile of debt securities in issue is given in Note 22 Debt securities in issue. ECB drawings as detailed in Note 20 Deposits by banks, are included in short-term debt. As a result of the dislocation of financial markets, the group's access to wholesale funding has been reduced, durations shortened and credit spreads widened. However, the group has the ability to use the loan book as collateral for borrowings as detailed in Note 8 Loans and receivables to customers. The Banking Assets and Liabilities Committee also monitors the dependencies inherent in the funding by reviewing the group s usage of lines of credit with financial institutions. Liquidity reports to the Banking Assets and Liabilities Committee each month include the loan-to-deposits ratio. The loan-to-deposit ratio at the end of 2009 was 246% compared to 271% at the end of The group is working to reduce this ratio in 2010 by an increased focus on retail deposits and by non-replacement of maturing loans. The regulatory protocol, under which the group operates, requires levels of liquidity based on various cash flow stress tests. The key limits applied are that an institution must have sufficient available liquidity to cover 100% of outflows over the next eight days and 90% of outflows over the coming 9-30 days. The group monitors the liquidity ratio daily and reports weekly to the Financial Regulator. As a consequence of the industry-wide wholesale funding difficulties experienced during the first half of 2009, the Financial Regulator agreed to a temporary easing of the liquidity requirements noted above. This easing applied from April to September The standard liquidity requirements applied again since September 2009 and the group operated comfortably within these limits. In 2009, the group discovered that it had inadvertently breached a regulatory reporting requirement, and promptly notified and co-operated with the Financial Regulator. The Financial Regulator investigated the matter and entered into a settlement agreement with the company. On reaching that agreement, the Financial Regulator acknowledged that Irish Life & Permanent had co-operated fully and had been open and transparent throughout the process and that the company had taken prompt and complete remedial action to fully rectify the breaches. The company was reprimanded for the incident and paid a penalty in the sum 600,000. The matter is now closed. The table below presents the cash flows payable by the group by remaining contractual maturities at the statement of financial position date for non-derivative assets and liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. The group manages the inherent liquidity risk based on expected cash inflows and cash outflows accordingly the expected gap excluding derivatives is also presented below. This maturity mismatch approach takes into account the inherent stability of particular funding sources. The focus on an ongoing basis is to ensure that the bank can meet all its obligations as they fall due while continuing to provide for all other funding requirements of the bank. Regulatory limits based on this approach are imposed and except as described above, are adhered to. The bank's forward looking approach to liquidity management also incorporates running stressed scenarios for the purposes of contingency funding. Overview Business Review Corporate Governance Financial Statements The inclusion of information on non-derivative financial assets is necessary in order to understand the group's liquidity risk management as the liquidity is managed on a net asset and liability basis. 163

164 Notes to the Group Financial Statements 34. Financial risk management (continued) 2009 Group banking operations Up to Over 2 1 month months months months years years Total m m m m m m m Assets Debt securities 5, ,577 10,647 Loans and receivables to banks 2, ,142 Loans and receivables to customers 2,188 6,544 1,989 8,494 1,379 17,324 37,918 Total assets 10,208 6,557 2,010 8,553 1,478 21,901 50,707 Liabilities Deposits by banks 2,878 6,587 1,888 8, ,482 21,533 Customer accounts 6,406 4,566 1,327 2, ,068 Debt securities in issue and subordinated liabilities 1,793 2,017 1,082 4,227 1,717 2,390 13,226 Total liabilities 11,077 13,170 4,297 14,904 2,053 4,326 49,827 Gap (869) (6,613) (2,287) (6,351) (575) 17, Expected gap (excluding derivatives) 3,623 (2,969) (1,296) (5,060) (381) 5,345 (738) 2008 Group banking operations Up to Over 2 1 month months months months years years Total m m m m m m m Assets Cash and balances with central banks Debt securities 5, ,613 10,423 Loans and receivables to banks 1, ,008 Loans and receivables to customers 11,935 3,113 1,441 3,229 2,425 21,527 43,670 Total assets 19,519 3,137 1,497 3,310 2,585 26,204 56,252 Liabilities Deposits by banks 11,317 2, , ,863 Customer accounts 10,644 2, ,055 Debt securities in issue and subordinated liabilities 1,604 1, ,333 3,624 9,845 Total liabilities 23,565 5,619 1,331 2,324 3,366 4,558 40,763 Gap (4,046) (2,482) (781) 21,646 15,

165 Notes to the Group Financial Statements 34. Financial risk management (continued) The following table details the group's liquidity analysis for derivative instruments. The table has been drawn up based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates by the yield curves at the end of the reporting period Group banking operations Up to Over 2 1 month months months months years years Total m m m m m m m Net settled Interest rate swaps (20) (58) (75) (24) (96) (261) (534) Gross settled Currency swaps (19) (21) 1 (10) (39) (79) (74) (34) (90) (120) (436) 2008 Group banking operations Up to Over 2 1 month months months months years years Total m m m m m m m Net settled: Interest rate swaps (10) (50) (74) (127) (179) (258) (698) Gross settled: Currency swaps 148 (56) (3) (38) (54) (106) (77) (165) (233) (237) (680) Interest rate risk is managed principally through monitoring interest rate gaps. Repricing Gap is a duration-based interest rate gap analysis which displays the bank's positions in quarterly buckets, highlighting possible interest rate exposures on the statement of financial position. The gap is produced and quantified by Treasury Risk Management and reported to senior management daily. The gap analysis reflects the estimated discounted cash flows on a mix of interest bearing assets and liabilities and assumptions on the expected repricing dates. On a daily basis management are provided with the following analysis: - deals are grouped into assets and liabilities in each currency; - deals are grouped in quarterly 'buckets' according to their duration; - weighted average rates for the various 'buckets' of assets and liabilities are calculated and displayed; - a break-even rate is calculated and displayed; and - five Year Equivalent Risk Figure is calculated and displayed. Overview Business Review Corporate Governance Financial Statements 165

166 Notes to the Group Financial Statements 34. Financial risk management (continued) Interest Rate Repricing - Euro Group banking operations 2009 Over three Over six Over one months but months year Not more not more but not but not Over than three than six more than more than five months months one year five years years Total m m m m m m Assets Euro 31, ,160 3,286 1,253 39,787 Sterling 6, , ,130 US dollar Total assets (A) 38,391 1,089 4,194 3,553 1,374 48,601 Liabilities Euro (22,924) (3,098) (13,107) (959) (1,269) (41,357) Sterling (2,340) (126) (103) (49) - (2,618) US dollar (2,642) (347) (228) (19) (7) (3,243) Total liabilities (B) (27,906) (3,571) (13,438) (1,027) (1,276) (47,218) Derivatives Euro 1, ,699 (979) 4 3,085 Sterling (4,665) (105) (931) (193) (41) (5,935) US dollar 2, (62) 2,437 Derivatives affecting interest rate sensitivities (C) (1,415) 263 1,995 (1,157) (99) (413) Interest rate repricing gap Euro 9,519 (2,092) (7,248) 1,348 (12) 1,515 Sterling (413) (32) (423) US dollar (36) (95) (1) 10 - (122) Interest rate repricing gap 9,070 (2,219) (7,249) 1,369 (1) 970 (A) + (B) + (C) Cumulative interest rate repricing gap 9,070 6,851 (398)

167 Notes to the Group Financial Statements 34. Financial risk management (continued) Interest Rate Repricing - Euro Group banking operations 2008 Over three Over six Over one months but months year Not more not more but not but not Over than three than six more than more than five months months one year five years years Total m m m m m m Assets Euro 28,126 1,043 1,633 4, ,215 Sterling 4, , ,587 US dollar Total assets (A) 33,667 1,854 2,212 7, ,510 Liabilities Euro (30,772) (754) (1,211) (2,510) (1,282) (36,529) Sterling (4,782) (244) (229) (53) - (5,308) US dollar (2,467) (92) (30) (65) (7) (2,661) Total liabilities (B) (38,021) (1,090) (1,470) (2,628) (1,289) (44,498) Derivatives Euro 5,312 (581) (1,354) (2,846) 561 1,092 Sterling (559) (413) (195) (1,846) (59) (3,072) US dollar 1, (136) 1,979 Derivatives affecting interest rate sensitivities (C) 6,504 (936) (1,520) (4,415) 366 (1) Interest rate repricing gap Euro 2,666 (292) (932) (394) (270) 778 Sterling (421) US dollar (95) (34) (1) 226 (70) 26 Interest rate repricing gap 2,150 (172) (778) 145 (334) 1,011 (A) + (B) + (C) Cumulative interest rate repricing gap 2,150 1,978 1,200 1,345 1,011 Overview Business Review Corporate Governance Financial Statements 167

168 Notes to the Group Financial Statements 34. Financial risk management (continued) Liquidity risk - Life operations Liquidity risk for life operations' unit-linked funds is managed by Irish Life Investment Managers, by means of the asset selection process. For certain property-linked funds there is the ability to defer encashments for six months to allow time to sell properties. If properties cannot be sold within this period then the shareholder may have to provide liquidity for these funds. Currently a six month deferral period is applied to most property linked funds. The liquidity position of the property-linked funds is monitored on a regular basis by the Life Assurance Assets and Liabilities Committee. The liquidity risk for non-linked funds is managed through the matching of asset and liability cash flows as shown in the liquidity risk table for life operations. The following tables set out the expected cash flows for the assets and liabilities relating to insurance contract liabilities including discretionary participating contracts where the shareholder is exposed to a financial risk Over 5 Over 1 years Over 10 No more year but but less years but than 1 less than than 10 less than Over 20 No fixed year 5 years years 20 years years term Total m m m m m m m Assets Debt securities ,180-2,911 Equities Investment properties Reinsurance assets ,407-3,110 Total assets ,399 2, ,032 Liabilities Insurance contracts ,743 2,294-5,838 Gap (344) Over 5 Over 1 years Over 10 No more year but but less years but than 1 less than than 10 less than Over 20 No fixed year 5 years years 20 years years term Total m m m m m m m Assets Debt securities ,103-2,646 Equities Investment properties Reinsurance assets ,598-3,195 Total assets ,221 2, ,856 Liabilities Insurance contracts ,582 2,386-5,612 Gap (361) The group is also exposed to financial risk on certain investment contracts, principally tracker products where the shareholder has given the guarantee and other fixed interest return single premium bonds. Both assets and liabilities are held at fair value in the statement of financial position. It is group policy to purchase assets to match liabilities. The fair value of assets and liabilities by maturity date was disclosed in the Annual Report and Financial Statements This table has been updated in the current reporting period to reflect the undiscounted cash flows for the assets and liabilities by maturity date as set out below: 168

169 Notes to the Group Financial Statements 34. Financial risk management (continued) 2009 Over 1 Not more year but than less than No fixed 1 year 5 years term Total m m m m Assets Debt securities Derivatives Total assets Liabilities Investment contracts Gap Financial options and guarantees* *The calculation of financial options and guarantees is derived using stochastic modelling Over 1 Not more year but than less than No fixed 1 year 5 years term Total m m m m Assets Debt securities Derivatives Total assets Liabilities Investment contracts Gap Shareholders assets of the life operations including those assets required to match solvency capital are predominantly invested in cash and properties occupied by the group. An analysis of the shareholders assets is set out in Note 5 Shareholders equity of the EV basis supplementary information. Currency exposure The group s life assurance liabilities are primarily denominated in euro and it is group policy to match the currency exposure of the liabilities and the underlying assets. Market risk Banking operations Market risk is the risk of change in fair value of a financial instrument due to changes in equity prices, property prices, interest rates or foreign currency exchange rates. All market risks within the group are subject to strict internal controls and reporting procedures and are monitored by the Group's Assets and Liabilities Committee. All market risks are subject to limits on the magnitude and nature of exposures which may be undertaken. These limits are outlined in policy documents which are regularly reviewed by the board. Market risk in the group s banking operations arises from open positions in interest rate or currency products. The market risk exposure is managed by Group Treasury. Group Treasury use a number of tools to identify market risk; including Value at Risk, Interest Rate Gap, stress testing, mark to market / stop loss reports. Market risk is reported on an overall basis and is also separated into trading and non-trading portfolios. 169 Overview Business Review Corporate Governance Financial Statements

170 Notes to the Group Financial Statements 34. Financial risk management (continued) In managing market exposures, the group uses a Value at Risk (VaR) model. VaR is a statistically based estimate of potential loss on a portfolio from adverse market movements, which summarises the predicted maximum loss over a target time horizon and a given confidence level. Group Treasury adopts JP Morgan s Risk Metrics methodology which is a variance co-variance approach. The VaR model assumes a holding period of ten days, and a 99% confidence level is applied. Volatilities and correlations are exponentially weighted (the most recent event carries a greater weighting), and are calculated based on price movements over the past one hundred and fifty days. The volatilities and correlations are imported daily from Risk Metrics. VaR limits are approved by the board and are established for the overall banking book and trading portfolio. Individual trader VaR limits are established internally within Group Treasury. VaR reports are produced and quantified by Treasury Risk Management and reported to senior management daily and to the Banking Assets and Liabilities Committee on a monthly basis. The prices of similar financial instruments do not move in exact step with each other and, as a result, the total risk contained in a portfolio of different financial instruments cannot be calculated by taking the sum total of the individual risks. The VaR methodology employed by the group calculates the risk in each instrument held in the portfolio and measures the impact of diversification of the risk of the portfolio using an industry standard methodology called the variance co-variance approach. As with any market risk measurement system, the VaR methodology utilised by the group has recognised limitations. VaR does not measure event (e.g. crash) risk or incorporate assumptions about the range of likely changes in future market conditions, including behavioural assumptions about the various types of assets and liabilities (particularly those arising from retail transactions). Accordingly, the group supplements its VaR methodology with other risk measurement techniques including interest rate gap, stress testing and mark to market / stop loss reports. Stress testing techniques are also used as a means to assess potential exposure to predefined moves in individual risk factors. Stress tests (1 basis point move in interest rates) are applied to the Trading, Available-for-sale and Held -to-maturity portfolios and the results are reported to the Banking Assets and Liabilities Committee on a monthly basis. A projected income sensitivity analysis is also performed on the statement of financial position through the assets liabilities model. Group Treasury applies parallel basis point shocks to the individual yield curves of 50, 100, 200 and 300bps. The model incorporates projected new business growth, using current rates to produce its base case scenario. The impact on net interest income of a 100 basis point straight-line increase or decrease in Euro, Sterling and US Dollar interest rates, applied to positions at 31 December 2009 is shown in the table below: Euro m m 1% increase % decrease (0.3) (70.2) Sterling m m 1% increase (0.2) (2.6) 1% decrease US Dollar $m $m 1% increase % decrease (0.3) (1.4) Mark to market / Stop Loss limits are applied to the trading portfolio and to individual traders. Treasury Risk management reports stop losses to senior management on a daily basis. 170

171 Notes to the Group Financial Statements 34. Financial risk management (continued) Value at risk - Total m m At 31 December Average Minimum Maximum The non-trading book comprise the bank s retail and corporate deposit books and its loan book combined with the inter-bank book, wholesale funding instruments and the liquid asset investment portfolio, which is managed by Treasury. Value at risk non-trading m m At 31 December Average Minimum Maximum In addition to the responsibility for managing the liquidity and interest rate exposures arising in the banking operations, Treasury trades in liquid interest rate and foreign currency exchange rate instruments, and derivatives thereof, in order to profit from short-term changes in market values. Trading book exposures are subject to strict limits which have been approved by the board. Interest rate exposures within the trading book are measured using VaR. The methodology employed is the same as that utilised in respect of the non-trading book set out above. Foreign currency exposures are measured by reference to open positions (the sum of all long and short positions). All financial instruments held for trading purposes are clearly designated and are held separately from other holdings and all trading positions are mark to market. Value at risk trading m m At 31 December Average Minimum Maximum Overview Business Review Corporate Governance Financial Statements 171

172 Notes to the Group Financial Statements 34. Financial risk management (continued) Market risk - Life operations The life operations' investment policies set out the principles in respect of the management of market risk. They are determined by the Irish Life Assurance plc board and are designed to ensure that investment activity is carried out in a prudent and controlled manner. They are subject to annual review by the Irish Life Assurance plc board. The policies take into account the different requirements and risk profiles of different classes of policyholder funds, whether the investments are in respect of guaranteed or non-guaranteed business and the solvency and financial strength requirements of the life companies. Adherence to the policy is monitored by the Life Assurance Assets and Liabilities Committee. Liability as at 31 December 2009* m Unit-linked funds where the financial risks are primarily borne by the policyholders 24,025 Other policyholder liabilities 3,396 Unit-linked tracker bonds** and non-linked fixed-interest return single premium bonds 376 Discretionary participation insurance contracts 52 Investment financial options and guarantees 43 Non-controlling share of unit trust ,066 Liability as at 31 December 2008* m Unit-linked funds where the financial risks are primarily borne by the policyholders 20,873 Other policyholder liabilities 3,375 Unit-linked tracker bonds** and non-linked fixed-interest return single premium bonds 464 Discretionary participation insurance contracts 75 Investment financial options and guarantees 82 Non-controlling share of unit trust ,125 *Liabilities before reinsurance **Only includes unit-linked tracker bonds where the investment guarantee is given by the shareholder (it is group policy to purchase assets to match these liabilities). Tracker bonds where the investment guarantee is given by a third party and the shareholder is not at risk are included in unit-linked funds liabilities. The group holds assets at fair value to back the liabilities set out above together with the assets relating to the life operations solvency capital and free shareholder funds. Details of the financial options and guarantees are set out in Note 25 Financial options and guarantees. Unit-linked funds For unit-linked funds, which comprise 94% (2008: 93%) of the group s long-term insurance and investment contracts net of reinsurance liabilities, policyholders primarily bear the investment risk, with changes in the underlying investments being matched by changes in the underlying contract liabilities. On a day-to-day basis, cash outflows which are necessitated by policyholders withdrawing their funds are generally met by cash inflows from new investors. In circumstances where funds are contracting, or to meet unusually high levels of withdrawals, the group sells assets in the fund in order to meet the cash demands with any dealing costs charged to the underlying unit-linked fund and consequently the policyholders. 172 The underlying assets in the unit-linked funds are subject to credit and market risks in the form of interest rate, equity prices, foreign exchange and other market risks depending on the fund, including movement in property values. These changes are matched by changes in the unit-linked liabilities. Accordingly, the group is not directly exposed to significant liquidity, credit or market risks, although the policyholders' benefits will vary as a consequence. As the group is not exposed to any significant financial risk on assets or liabilities held within unit-linked funds, these are excluded from the risk analysis.

173 Notes to the Group Financial Statements 34. Financial risk management (continued) Decreases in the capital value of unit-linked funds (as a result of falls in market values of equities, property or fixed interest assets) will however reduce the future annual investment management charges that will be earned from unit-linked business. An additional risk the group faces in respect of unit-linked business is the risk that increases to surrender rates for both insurance and investment contracts reduces the value of future investment management charges. Actions to control and monitor this risk include charges applicable on some products where the investor surrenders early, regular experience monitoring, consideration of the sensitivity of product profitability to levels of lapse rates at the product development stage and initiatives within the relevant businesses to encourage customer retention. Equity / property price risk Equity / property price risk is defined as the risk of a potential loss in market values due to an adverse change in prices including changes in the value of investment properties. Investment in equities and property is generally limited to investments to match commitments to policyholders or to match a portion of the liabilities under discretionary participation contracts. The group's shareholders are exposed to direct equity / property holdings in its shareholder assets, including assets acquired through providing liquidity support to certain property-linked funds, and from the indirect impact of changes in the value of equities and properties held in policyholder funds from which management charges are taken. The group manages the life operations measuring earnings in accordance with the European Embedded Value (EEV) principles issued in May 2004 by the European Chief Financial Officer s Forum. The Embedded Value Supplemental Information included from page 216 includes a measurement of the sensitivity of the continuing operations to changes in equity / property values. Derivative risk Derivatives are permitted to be held only as part of efficient portfolio management. All investments made are within the parameters set down by senior management as well as by statutory requirements. There is regular reporting of asset and liability mismatches to investment committees within business units and to the Life Assurance Assets and Liabilities Committee. Derivative transactions are fully covered by either cash or corresponding assets and liabilities. Interest rate risk Life operations of the group carry interest rate risk exposures on its debt securities and its loans to banks portfolio and on its fixed-rate insurance and investment liabilities. It is the group s policy where possible to match its asset and liability profile and this is monitored on a regular basis by the investment committees within each business unit and by the Life Assurance Assets and Liabilities Committee. The Embedded Value Supplemental Information included from page 216 includes a measurement of the sensitivity of the continuing operations to changes in interest rates. Insurance risk Insurance risk is the risk associated with the variability in liability cash flows caused by fluctuations in policyholder claims under insured events. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. The principal risks are that the frequency of claims or the severity of claims is greater than expected. Insurance events are random by their nature and the actual number and size of events during any one year may vary from those estimated using established statistical techniques. The group manages its insurance risk through underwriting limits, approval procedures for new products and reinsurance where appropriate. Reinsurance is managed in accordance with approved policy and is regularly reviewed by the Life Assurance Assets and Liabilities Committee. Overview Business Review Corporate Governance Financial Statements 173

174 Notes to the Group Financial Statements 34. Financial risk management (continued) The assumptions used to place a value on the liabilities of insurance contracts and the sensitivity of these assumptions to a range of factors is set out in Note 24 Life insurance contracts. Insurance risk falls into three main categories: - Life assurance contracts - Annuity contracts - Insurance contracts with a discretionary participation feature. Life assurance contracts These are contracts where the benefit is payable on death or serious illness. The benefit may be a lump sum or in the case of serious illness an annual income stream which may be fixed or escalate at a fixed rate or in line with a relevant index. Insurance risks associated with life insurance contracts include the risk of epidemics, accidents and changes in lifestyle such as smoking habits and stress-related diseases. Life assurance contracts may be unit-linked or non linked. For unit-linked contracts the group charges for the insured risk on a monthly basis and has the right to alter these charges based on its risk experience. In this way the group can limit its exposure. Non-linked business may be group business or individual contracts. Group business is normally written for a maximum of a three year term and the insurance risk may be repriced at the end of each term. For individual business written for a fixed term there are no mitigating terms and conditions which reduce the insurance risk. Individual business risk is managed through the inclusion of medical selection in the underwriting criteria and through reinsurance of the risk. The sum-at-risk amounts net of reinsurance are as follows: m m Unit-linked contracts 12,311 11,415 Non-linked contracts - Individual 17,808 17,916 - Group 52,318 51,859 The calculation of the insurance contract liabilities allows for the discounted expected cost of the sum-at-risk amounts shown above using mortality and morbidity assumptions and interest rate assumptions as shown in Note 24(b) Life insurance contracts. Annuity contracts These are contracts where the policyholder in return for a single premium paid at the start of the contract purchases an annual income stream for the remainder of his or her life. Annuities may be level, escalate at a fixed rate or in line with a relevant index. Payments are often guaranteed for a minimum term regardless of survival. Annuities may also continue after death in full or in part to a surviving partner. The main insurance risk associated with this product is longevity risk and in particular that improvements in medical science and social conditions would increase longevity. In recognition of this risk, in 2002 the group decided to reinsure 57% of the in force portfolio of annuity contracts. All new annuity business written since 2002 has also been 100% reinsured. 174

175 Notes to the Group Financial Statements 34. Financial risk management (continued) Under the reinsurance, treaty longevity risk is borne by the reinsurance company. Assets are held by the reinsurance company in a charged account, all withdrawals from which have to be authorised by Irish Life. Assets are managed in accordance with a mandate which matches the asset and liabilities. The reserves held for annuity contracts are as follows: m m Gross 2,059 1,950 Reinsurer s share (1,353) (1,376) Insurance contracts with a discretionary participation feature The group has a closed book of with profit business where the policyholder benefits from a discretionary annual bonus and a discretionary final bonus. There has been no new business written since it was set up as a closed fund in The shareholder does not participate in the with profit fund. The assets of the fund are invested in a fund which invests in a mixture of equities and fixed-interest securities. The group has discretion on the level of bonuses declared. The total guaranteed sums assured in the future and bonuses payable on death as at 31 December 2009 are 62m (2008: 96m). Reserves as at 31 December 2009 are 52m (2008: 75m) which on a discounted cash flow basis are sufficient to meet fund liabilities. Operational risk Operational risk at Irish Life & Permanent plc is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk management within the group also addresses regulatory risk which is defined as the risk of uncertainty in profits due to unforeseen changes in regulation. Regulatory risk is not the failure to meet regulations (that is compliance risk), rather it is the risk that the group is not sufficiently aware of the changing regulatory environment, increasing the cost of compliance and reducing the effectiveness of risk management processes. The group operates an industry best practice operational risk framework which includes the measurement and monitoring of both operational and regulatory risk. The aim of this framework is to help focus management attention on the subset of operational risks which are material at each level of the organisation (either in terms of financial impact, or more broadly because of reputational or regulatory impacts). Central group management, and each of the business units within the group, identify the material operational risks to which they are exposed. The identification process is based on a detailed review of business activities, supplemented by reference to external industry information. Each business unit has a designated operational risk manager who is responsible for coordinating operational risk management within that business unit. The local management team of each business unit is responsible for reviewing and authorising the register of main operational risks for each business unit on an annual basis. The group operational risk framework utilises the business unit operational risk registers to identify the group s material operational risks. Materiality is determined by a quantitative and qualitative assessment of each risk by reference to its likelihood of incidence and potential impact. These material operational risks are regularly reported to the Group Operational Risk Committee and the Board Risk and Compliance Committee. The Group Operational Risk Committee is responsible for steering progress on the measurement and mitigation of these risks. Key risk indicators are used to carry out this monitoring process. Overview Business Review Corporate Governance Financial Statements 175

176 Notes to the Group Financial Statements 34. Financial risk management (continued) Each of the operational risks considered material for the group is the subject of a documented, in depth analysis of the cause and impact of the risk. An appropriate control environment is established to protect against the risk. A sub-register of significant operational risks at business unit level is also maintained by the group. Each of the business units (or group function as appropriate) manages and monitors these operational risks to group requirements. Irish Life & Permanent plc has a formal, documented Operational Risk Policy which has been approved by the board. Operational risk recording The group operates an industry best practice risk and event recording database. The database is managed by the Group Operational Risk function and records all operational risk (including regulatory risk and reputational risk) events and near misses across the group. Risk events and their associated impact are analysed in accordance with the group s operational risk categories which also comply with Basel II requirements. All loss events are recorded in the register. The operational risk database generates risk reports for review at the Operational Risk Committee meetings. Each report details the number of operational risk loss events and near misses by business unit for the period. Operational risk economic capital Irish Life & Permanent plc employs the Basel II standardised approach as the basis for calculating economic capital for operational risk in the banking business. This approach utilises an established multiplier ("beta" factor) against a three-year average risk-weighted relevant indicator measure of net income to derive a capital requirement. The beta multipliers are drawn from Basel II benchmark values and are differentiated by business line. Operational risk mitigation Operational risk cannot be entirely eliminated from an entity s business operations without the cessation of business. Acknowledging this fact, the group has implemented risk mitigation techniques (such as business continuity planning for example) to reduce the level of this risk where possible. The group maintains a comprehensive suite of insurance cover in order to mitigate against operational risk to the extent possible. Aligned closely to the operational risk event types established by Basel II, insurance cover includes: - Theft and fraud (internal and external) - Civil liability - Employer s liability - Business interruption - Directors and officers' liability - Natural catastrophe cover (Business Continuity Planning). 176

177 Notes to the Group Financial Statements 35. Fair value of financial instruments The fair value of financial instruments held by the group is set out below: Group Carrying Carrying amount Fair value amount Fair value m m m m Financial assets Cash and balances with central banks (note 4) Items in course of collection (note 4) Debt securities (note 5) 15,780 15,752 10,929 10,715 Equity shares and units in unit trusts (note 6) 13,510 13,510 10,390 10,390 Derivative assets (note 7) 1,169 1,169 1,162 1,162 Loans and receivables to customers (note 8) 38,592 33,200 40,075 34,912 Loans and receivables to banks (note 10) 4,925 4,925 4,775 4,775 Financial liabilities Deposits by banks (note 20) 18,713 17,930 18,546 18,562 Customer accounts (note 21) 14,562 14,562 14,118 14,191 Debt securities in issue (note 22) 13,262 13,209 10,899 11,084 Derivative liabilities (note 7) Investment contract liabilities (note 23) 24,032 24,032 21,118 21,118 Subordinated liabilities (note 29) 1,644 1,805 1,699 1,773 Company Carrying Carrying amount Fair value amount Fair value m m m m Financial assets Cash and balances with central banks (note 4) Items in course of collection (note 4) Debt securities (note 5) 12,438 12,409 9,359 9,145 Derivative assets (note 7) Loans and receivables to customers (note 8) 38,165 33,485 39,545 35,580 Loans and receivables to banks (note 10) 2,600 2,600 1,988 1,988 Financial liabilities Deposits by banks (note 20) 17,842 17,909 17,581 17,597 Customer accounts (note 21) 20,830 20,830 19,552 19,624 Debt securities in issue (note 22) 12,558 12,505 10,176 10,360 Derivative liabilities (note 7) ,793 1,793 Subordinated liabilities (note 29) 1,432 1,593 1,492 1,566 Overview Business Review Corporate Governance Financial Statements 177

178 Notes to the Group Financial Statements 35. Fair value of financial instruments (continued) The volatility in financial markets and the illiquidity that is evident in these markets has reduced the demand for many of these instruments and this creates a difficulty in estimating the fair value of certain financial instruments. The valuation methodologies for calculating the fair value of financial instruments are set out below. Deposits by banks / customer accounts The estimated fair value of current accounts and deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed-interest bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturities. Cash and balances with central bank / items in course of collection The fair value of these financial instruments is equal to their carrying value due to these instruments being repayable on demand and short-term in nature. Loans and receivables The group s valuation methodology for loans and receivables uses a discounted cash flow methodology that takes into account original underwriting criteria, borrower attributes (such as age and credit scores), loan to value ratios and expected losses on the portfolios. These features are used to estimate expected cash flows which are then discounted at a risk-adjusted rate. Model inputs are calibrated against historical data and published forecasts and, where possible, against current or recent observed transactions in mortgage-backed securities originated by the Banking group. This calibration process is inherently subjective as different input sources may imply different levels of expected losses and discount rates; also, adjustments are required for the differing features of different securities. Debt securities - available for sale (AFS) As at 31 December 2009, these debt securities have been classified as level 1 ( 5,576m) and level 2 ( 261m) in the fair value hierarchy below. The fair value of such instruments are based on an external asset pricing tool from a recognised market source. This tool incorporates both market observable and unobservable data. Significant inputs include current and historical market prices of these instruments, the current and historical prices of similar instruments and price estimates from indirect pricing models. Debt securities of 261m are classified as level 2 in the fair value hierarchy below due to less liquidity in the market for these instruments and a greater reliance on inputs derived from indirect market observable data. Debt securities at fair value through profit or loss (FVTPL) The fair values of debt securities in an active market are based on quoted market prices. Debt securities in inactive markets are determined using broker valuations and / or valuation techniques such as discounted cash flow models which are subject to internal management review. Such models incorporate inputs such as current interest rate, for credit spreads and forward foreign exchange rates. The bulk of debt securities are sourced from quoted market prices. Management review the source of the market prices, the liquidity of the security, the credit risk and recent market history to assess the reasonableness of the valuations. The significant categories of debt securities where fair value valuations are not obtained using quoted market prices are as follows: (i) Zero coupon bonds amounted to 361m (2008: 587m). As at 31 December 2009, such bonds are classified as level 2 in the fair value hierarchy below. Valuations are determined by a discounted cash flow model produced by a third-party system. Model inputs include bond cash flows, interest rates and term to maturity, all of which are market observable data. (ii) French government strip bonds amounted to 638m (2008: 312m). As at 31 December 2009, such bonds are classified as level 2 in the fair value hierarchy below. Valuations are obtained from a third-party broker who extracts the valuation from their proprietary model. Model inputs include bond cash flow, interest rates and credit spreads which are market observable data. 178

179 Notes to the Group Financial Statements 35. Fair value of financial instruments (continued) (iii) Housing finance agency inflation-linked bond amounted to 84m (2008: 40m). As at 31 December 2009, such bonds are classified as level 2 in the fair value hierarchy below. Valuations are obtained from a third-party broker market maker. The broker considers interest rates, credit spreads and inflatory expectations in arriving at their quote. (iv) European investment bank inflation-linked notes amounted to 528m (2008: 508m). As at 31 December 2009, these notes are classified as level 3 in the fair value hierarchy below. Valuation are obtained from an external broker using a valuation technique incorporating significant inputs, some of which are market unobservable data. Such inputs include a discount to reflect the lack of liquidity in the market for these instruments. During the year ended 31 December 2008 the group availed of the amendment to IAS 39 and IFRS 7 which permitted financial assets classified as available for sale ( AFS ) to be reclassified out of the AFS category to the loans and receivables category. Such securities are carried at amortised cost in accordance with loans and receivables accounting policy. The fair value of such securities are determined by using valuation models incorporating a mix of broker quotes for securities with similar terms and features and unobservable data. Equity shares and units in unit trusts The fair value of quoted equities are based on quoted market price sourced from external pricing services where securities are traded on a recognised exchange. Equity investments valued using quoted market prices totalled 13,139m (2008: 9,285m) as at 31 December The net asset value ( NAV ) based on the underlying fair value of the investments of the unit trusts and funds, as reported by the investment managers has been used as the basis for determining the fair value of the group s interest in unit trusts and funds. Therefore units in unlisted unit trusts and unlisted investment funds are valued using the latest price or valuation issued by unit trust and fund managers. Each unit trust price is reviewed by management to assess the reasonableness of the price. Management considers the illiquidity and pricing basis of any underlying assets, any restrictions on redemptions put in place by the unit trust and fund managers and evidence of trading taking place at the issued price. If appropriate the latest price or valuation issued by the unit trust and fund managers is adjusted to reflect the illiquidity or latest valuations of underlying assets. The significant categories of equity shares and units in unit trusts where fair value valuations are not obtained using quoted market prices are as follows: (i) Units in unit trusts that are not priced or traded on a daily basis amounted to 100m. As at 31 December 2009, these units are classified as level 2 in the fair value hierarchy below due to a lack of liquidity in the market. (ii) Units held in a property unit trust amounted to 195m. As at 31 December 2009, these units are classified as level 3 in the fair value hierarchy below. These units are valued by an independent external property valuer. These valuations are reliant on expert judgement by the valuer and consequently are not verifiable to observable market data. (iii) Unlisted shares held in private companies amounted to 36m. As at 31 December 2009, these shares are classified as level 3 in the fair value hierarchy below. These valuations are prepared internally using the most recent financial statements of the companies, which are market unobservable data. Derivative assets and liabilities The fair values for derivatives traded in active markets are obtained from prevailing quoted prices. Active markets would include all exchange traded equity, currency and commodity futures, quoted on recognised futures and derivative exchanges. Overview Business Review Corporate Governance Financial Statements 179

180 Notes to the Group Financial Statements 35. Fair value of financial instruments (continued) Derivatives in inactive markets are determined using broker valuations and / or valuation techniques such as discounted cash flow models which are subject to internal management review. Such models incorporate inputs such as current interest rate, time to maturity and forward foreign-exchange rates. Observable prices model inputs are usually available in the market for exchange traded derivatives (primarily options) and simple over the counter derivatives such as interest rate swaps. The significant categories of derivatives where fair value valuations are not obtained using quoted market prices are as follows: (i) Derivative instruments relating to CPPI products (as described in Note 7 Derivative Instruments) amounted to 822m (2008: 825m). As at 31 December 2009, these instruments are classified as level 2 in the fair value hierarchy below. Valuations are obtained from a third-party broker who extracts the valuation from their proprietary model. This uses a standard option pricing model comprising Monte Carlo simulation and discounted cash flows. Significant inputs include volatility of returns, risk-free discount rate and expected returns. (ii) Options used in tracker products amounted to 38m. As at 31 December 2009, these options are classified as level 3 in the fair value hierarchy below. These options are valued by a third-party broker based on a valuation model incorporating proprietary inputs, some of which are market unobservable data. (iii) Derivative assets of 270m and derivative liabilities of 411m related to fair value hedges in respect of the bank operations. As at 31 December 2009, these derivative instruments have been classified as level 2 in the fair value hierarchy below. Valuations are obtained from third-party brokers who extract valuation from a mix of discount cash flow models and pricing models. Model inputs include yield curve and volatility measurements which are market observable data. Debt securities in issue / subordinated liabilities The fair values for debt securities issued are based on quoted market prices where available. Where quoted prices are not available valuations are based on a third-party system which uses observable data, with the balance valued by management using discounted cash flow models using interest rate yield curves and observable data. Fair value measurements recognised in the statement of financial position Pursuant to the recent amendments to IFRS 7 Financial Instruments: Disclosures, the group has adopted the fair value hierarchy classification of financial instruments. This requires the group to classify its financial instruments held at fair value according to a hierarchy based on the significance of the inputs used to arrive at the overall fair value of these instruments. The three levels of the fair value hierarchy as defined by the accounting standard are outlined below: Level 1: fair value measurements derived from quoted market prices (unadjusted) in active markets for identical assets or liabilities. Level 2: fair value measurements derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: fair value measurements derived from valuation techniques that include inputs for the asset and liability that are based on unobservable market data. This fair value hierarchy has been applied to all of the financial instruments that are measured at fair value in the statement of financial position. Categorisation of these financial instruments according to the fair value hierarchy is included below for both group and company as at 31 December 2009: 180

181 Notes to the Group Financial Statements 35. Fair value of financial instruments (continued) Group Valuation Valuation techniques techniques Quoted using using market observable unobservable prices market data market data Level 1 Level 2 Level 3 Total Financial instruments measured at fair value m m m m Financial assets Debt securities Available for sale (note 5) 5, ,837 At fair value through profit and loss (FVTPL) (note 5) 6,745 1, ,373 Equity shares and units in unit trusts (note 6) 13, ,510 Derivative assets (note 7) 39 1, ,169 Financial liabilities Derivative liabilities (note 7) Investment contract liabilities* (note 23) - 24,032-24,032 *Investment contract liabilities are backed by assets attributable to the life operations including assets which are carried at FVTPL which are measured at quoted market prices and valuation techniques using observable market data as described above. Reconciliation of level 3 fair value measurements of financial assets Group 2009 Equity Debt shares and securities units in Derivative at FVTPL unit trusts assets Total m m m m Opening balance Total gains or losses - in profit or loss - Investment return 20 (350) 7 (323) Transfers into level ,139 Sales - (1) (17) (18) Purchases Total gains or losses for the year included in profit or loss for assets held at the end of the reporting year. - Investment return 21 (340) 9 (310) Following a review and in-depth analysis of valuation techniques adopted by the group as at 31 December 2009, certain instruments have been transferred into level 3 per the fair value hierarchy classification. Transfers into level 3 occurred for these instruments due to inputs of the underlying valuation techniques becoming unobservable. The majority of such instruments classified as level 3 have been outlined in detail above. Overview Business Review Corporate Governance Financial Statements 181

182 Notes to the Group Financial Statements 35. Fair value of financial instruments (continued) Company Derivative assets and liabilities Interest rate swaps amounted to 57m in relation to Fastnet 2 Limited. As at 31 December 2009, these swaps have been classified as level 3 in the company's fair value hierarchy below. These swaps are valued from a thirdparty broker based on a valuation model / technique incorporating inputs which are market unobservable data. Such inputs include assumptions on factors such as amortisation rates, forward ECB rates and repayment uncertainties. Company Valuation Valuation techniques techniques Quoted using using market observable unobservable prices market data market data Level 1 Level 2 Level 3 Total Financial instruments measured at fair value m m m m Financial assets Debt securities - Available for sale (note 5) 5, ,837 Derivative assets (note 7) Financial liabilities Derivative liabilities (note 7) Reconciliation of level 3 fair value measurements of financial assets: Company 2009 Derivative assets Total m m Opening balance - - Total gains or losses - in profit or loss - net interest income Transfers into level Total gains or losses for the year included in profit or loss for assets held at the end of the reporting year. - Net interest income Following a review and an in depth analysis of valuation techniques adopted by the company as at 31 December 2009, certain derivative assets have been transferred into level 3 per the fair value hierarchy classification. Transfers into level 3 occurred for these derivative assets due to inputs of the underlying valuation technique becoming unobservable. The derivative assets classified as level 3 are outlined in detail above. 182

183 Notes to the Group Financial Statements 35. Fair value of financial instruments (continued) Sensitivity analysis of level 3 fair value measurements Group Financial instruments classified as level 3 amounting to 809m, debt securities, equity shares and units in unit trusts, derivative assets, are held within unit-linked funds in respect of the group s life operations. For unit-linked funds, any fair value changes in unit-linked assets are matched by changes in unit-linked liabilities. As a result, sensitivity analysis has not been undertaken for level 3 financial instruments held within unit-linked funds. The balance of 27m of European investment bank inflation-linked notes classified as level 3 are not held within unit-linked funds, hence the fair value of such notes are sensitive to changes in the underlying assumptions (inflation expectations, nominal yields and credit spreads). The following table shows the sensitivity of the fair value of these notes to a +1% /-1% movement in the assumptions respectively as at 31 December 2009: 2009 Reflected in income statement Favourable Unfavourable change change m m Debt securities at FVTPL - Inflation expectations 7 (5) - Nominal yields 6 (5) - Credit spreads 6 (5) Overview Business Review Corporate Governance Financial Statements 183

184 184 Notes to the Group Financial Statements 36. Measurement basis of financial instruments The table below analyses the carrying amounts of the financial assets and liabilities by accounting treatment and by statement of financial position classification. Group 2009 At fair value At fair value through profit or loss through equity Derivatives Loans and Fair value designated Held Designated receivables / adjustment on Investment as fair value for upon initial Available- amortised hedged assets contract hedges trading recognition for-sale cost and liabilities** liabilities*** Total m m m m m m m m Financial assets: Cash and balances with central banks (note 4) Items in course of collection (note 4) Debt securities (note 5) - - 8,373 5,837 1, ,780 Equity shares and units in unit trusts (note 6) , ,510 Derivative assets* (note 7) ,169 Loans and receivables to customers (note 8) , ,592 Loans and receivables to banks (note 10) - - 2,321-2, ,925 Total financial assets ,204 5,837 42, ,302 Financial liabilities: Deposits by banks (note 20) , ,713 Customer accounts (note 21) , ,562 Debt securities in issue (note 22) , ,262 Derivative liabilities (note 7) Investment contract liabilities*** (note 23) ,032 24,032 Subordinated liabilities (note 29) , ,644 Total financial liabilities , ,032 72,878

185 Notes to the Group Financial Statements 36. Measurement basis of financial assets and liabilities (continued) Group 2008 At fair value At fair value through profit or loss through equity Derivatives Loans and Fair value designated Held Designated receivables / adjustment on Investment as fair value for upon initial Available- amortised hedged assets contract hedges trading recognition for-sale cost and liabilities** liabilities*** Total m m m m m m m m Financial assets: Cash and balances with central banks (note 4) Items in course of collection (note 4) Debt securities (note 5) - - 7,739 1,220 1, ,929 Equity shares and units in unit trusts (note 6) , ,390 Derivative assets* (note 7) ,162 Loans and receivables to customers (note 8) , ,075 Loans and receivables to banks (note 10) - - 2,781-1, ,775 Total financial assets ,910 1,220 44, ,655 Financial liabilities: Deposits by banks (note 20) , ,546 Customer accounts (note 21) , ,118 Debt securities in issue (note 22) , ,899 Derivative liabilities (note 7) Investment contract liabilities*** (note 23) ,118 21,118 Subordinated liabilities (note 29) , ,699 Total financial liabilities , ,118 66,930 *Included in held-for-trading category of 922m (2008: 991m) is 886m (2008: 935m) held for the benefit of policyholders and to match tracker bond liabilities. **Financial assets and liabilities that are part of a hedging relationship are carried at amortised cost adjusted for changes in the fair value of the hedged risk. ***Investment contract liabilities are backed by assets attributable to the life operations including assets which are carried at FVTPL. Following the sale of the held-to-maturity portfolio in February 2008, the group does not hold any held-to-maturity securities. 185 Overview Business Review Corporate Governance Financial Statements

186 186 Notes to the Group Financial Statements 36. Measurement basis of financial assets and liabilities (continued) Company 2009 At fair value At fair value through profit or loss through equity Derivatives Loans and Fair value designated Held Designated receivables/ adjustment on as fair value for upon initial Available- amortised hedged assets hedges trading recognition for-sale cost and liabilities* Total m m m m m m m Financial assets: Cash and balances with central banks (note 4) Items in course of collection (note 4) Debt securities (note 5) ,837 6, ,438 Derivative assets (note 7) Loans and receivables to customers (note 8) , ,165 Loans and receivables to banks (note 10) ,600-2,600 Total financial assets ,837 47, ,738 Financial liabilities: Deposits by banks (note 20) ,842-17,842 Customer accounts (note 21) ,830-20,830 Debt securities in issue (note 22) , ,558 Derivative liabilities (note 7) Subordinated liabilities (note 29) , ,432 Total financial liabilities , ,073

187 Notes to the Group Financial Statements 36. Measurement basis of financial assets and liabilities (continued) Company 2008 At fair value At fair value through profit or loss through equity Derivatives Loans and Fair value designated Held Designated receivables / adjustment on as fair value for upon initial Available- amortised hedged assets hedges trading recognition for-sale cost and liabilities* Total m m m m m m m Financial assets: Cash and balances with central banks (note 4) Items in course of collection (note 4) Debt securities (note 5) ,191 8, ,359 Derivative assets (note 7) Loans and receivables to customers (note 8) , ,545 Loans and receivables to banks (note 10) ,988-1,988 Total financial assets ,191 49, ,391 Financial liabilities: Deposits by banks (note 20) ,581-17,581 Customer accounts (note 21) ,552-19,552 Debt securities in issue (note 22) , ,176 Derivative liabilities (note 7) , ,793 Subordinated liabilities (note 29) , ,492 Total financial liabilities ,378-48, ,594 * Financial assets and liabilities that are part of a hedging relationship are carried at amortised cost adjusted for charges in the fair value of the hedged risk. 187 Overview Business Review Corporate Governance Financial Statements

188 Notes to the Group Financial Statements 37. Current / non-current assets and liabilities The following tables provide an analysis of certain asset and liability line items that include amounts expected to be recovered or settled no more than twelve months after the balance sheet date (current) and more than twelve months after the financial position date (non-current). Group Current Non-current Total Current Non-current Total m m m m m m Assets Cash and balances at central banks (note 4) Items in the course of collection (note 4) Debt securities (note 5) 3,281 12,499 15, ,011 10,929 Equity shares and units in unit trusts (note 6) 13,510-13,510 10, ,390 Derivative assets (note 7) 68 1,101 1, ,011 1,162 Loans and receivables to customers (note 8) 6,967 31,625 38,592 7,373 32,702 40,075 Loans and receivables to banks (note 10) 4,925-4,925 4,775-4,775 Liabilities Deposits by banks (note 20) 18, ,713 17,386 1,160 18,546 Customer accounts (note 21) 14, ,562 13, ,118 Debt securities in issue (note 22) 8,204 5,058 13,262 3,206 7,693 10,899 Derivative liabilities (note 7) Subordinated liabilities (note 29) - 1,644 1,644-1,699 1,699 Company Current Non-current Total Current Non-current Total m m m m m m Assets Cash and balances at central banks (note 4) Items in the course of collection (note 4) Debt securities (note 5) 3,291 9,147 12,438 1,939 7,420 9,359 Derivative assets (note 7) Loans and receivables to customers (note 8) 6,429 31,736 38,165 6,746 32,799 39,545 Loans and receivables to banks (note 10) 2,600-2,600 1,988-1,988 Liabilities Deposits by banks (note 20) 17,842-17,842 16, ,581 Customer accounts (note 21) 20, ,830 13,960 5,592 19,552 Debt securities in issue (note 22) 8,209 4,349 12,558 3,340 6,836 10,176 Derivative liabilities (note 7) ,711 1,793 Subordinated liabilities (note 29) - 1,432 1,432-1,492 1,

189 Notes to the Group Financial Statements 38. Assets held in unit-linked funds m m Designated as FVTPL - Debt securities 6,728 6,290 - Equities and units in unit trusts 13,442 10,070 - Loans and receivables to and from banks 1,923 1,664 - Derivative assets and liabilities Cash / other assets / other liabilities Total designated at FVTPL 23,071 18,965 - Investment properties 1,751 2,253 As at 31 December 24,822 21,218 The balances are the total assets held in unit-linked policyholder funds and include tracker products and funds managed by external fund managers. The balances are gross of consolidation adjustments which eliminate inter group balances and holdings of Irish Life & Permanent plc shares. 39. Net interest income m m Interest receivable Loans and receivables to customers 1,051 1,809 Loans and receivables to banks Debt securities and other fixed-income securities - Held to maturity Available for sale Loans and receivables Amortisation of AFS securities reclassified to loans and receivables (note 5) (15) (9) Lease and instalment finance Net losses on interest rate hedges (15) (12) 1,281 2,180 Interest payable Deposits from banks (313) (455) Due to customers (335) (415) Interest on debt securities in issue (205) (725) Interest on subordinated debt (57) (79) Interest on other borrowed funds (11) (16) Net gains / (losses) on interest rate hedges 3 (4) (918) (1,694) Net interest income Interest income accrued on impaired loans was 56m (2008: 40m). In 2009, the group has classified net gains / losses on hedge instruments to interest receivable and interest payable as appropriate has been reclassified on a consistent basis. In 2008 the net position of 16m negative was shown under interest receivable. Net interest income includes the movement in deferred acquisition costs of 7m credit due to the lower redemption rate on the mortgage portfolio (2008: 32m). The 2009 net interest income includes circa 30m negative impact of mismatches which arose between the fees charged on fixed rate mortgage switches and the cost 30m of closing fixed rate positions. Overview Business Review Corporate Governance Financial Statements 189

190 Notes to the Group Financial Statements 40. Net fees and commission expenses m m Fees and commission income Fees and commission earned on banking services Commission earned on insurance and investment contracts Fees and commission expenses Fees and commission payable on banking services (10) (9) Fees in respect of Government Guarantee scheme (29) (8) Commission payable on life and investment contracts (107) (121) Deferral of acquisition costs on investment contracts (note 18) Amortisation of deferred acquisition costs on investment contracts (note 18) (56) (52) (157) (130) Net fees and commission expenses (80) (54) 41. Trading income m m Designated held for trading Interest rate instruments (4) 6 Foreign exchange instruments - (1) (4) Premiums on insurance contracts m m Individual premiums Recurring Single Premiums under group contracts Recurring Single

191 Notes to the Group Financial Statements 43. Investment return Financial assets designated at FVTPL m m Equity shares Dividends Fair value gains / (losses) 2,553 (7,652) 2,828 (7,244) Debt securities Interest Profit on buy back of debt securities in issue 8 - Fair value (losses) / gains (18) Realised exchange losses on debt securities / equity shares (115) (130) Total investment return on financial assets designated at FVTPL 2,939 (6,663) Profit on the sale of held-to-maturity portfolio - 29 Derivatives designated as held-for trading ('HFT') Income - 11 Exchange gains - 73 Fair value losses (3) (75) (3) 9 Property market / Money market Income from investment properties Interest Exchange (losses) / gains (29) 53 Fair value losses on investment property (517) (1,430) Provision on onerous contract (33) - (341) (1,105) Consolidation adjustments (note 3)* (10) (11) Total investment return 2,585 (7,741) Total investment return Income from investment properties Dividends Interest Income from derivatives - 11 Profit on the sale of held-to-maturity portfolio - 29 Profit on buy back of debt securities in issue 8 - Exchange losses (144) (4) Unrealised gains / (losses) 2,015 (8,678) Provision on onerous contract (33) - Consolidation adjustments (note 3)* (10) (11) Total investment return 2,585 (7,741) * 2m (2008: 2m) arises due to different accounting treatment between the bank and the life company. The bank carries the liabilities at amortised cost; however, the corresponding assets in the life company are carried at FVTPL. 8m (2008: 9m) arises on the consolidation of the movement in the value of properties financed by non-recourse inter group loans. Overview Business Review Corporate Governance Financial Statements 191

192 Notes to the Group Financial Statements 44. Claims on insurance contracts m m Death and disability benefit Maturities and encashments Annuities Investment expenses m m Expenses relating to investment properties Other investment expenses Investment property expenses include 1m (2008: 1m) in respect of vacant properties. 46. Administrative and other expenses m m Administrative expenses Depreciation Amortisation of intangible assets Expenses are after charging the following: m m Auditor's remuneration (including VAT) - Audit services Audit-related services Non-audit services* Operating lease rentals - land and buildings *Non-audit services principally comprise taxation and transaction due diligence services. 192

193 Notes to the Group Financial Statements 47. Employment costs Group Staff costs (including executive directors) for the year were: m m Wages and salaries* Social insurance Pension costs - Payments to defined contribution pension schemes Charge in respect of defined benefit pension schemes (note 19) Equity-settled transactions 1 - Charged to income statement Unrecognised actuarial (gains) / losses on defined benefit pension schemes arising in the year (117) * Including commission paid to sales staff Average number of staff (including executive directors) employed during the year: Ireland 4,527 4,856 UK ,694 5,053 Life assurance 1,868 1,978 Banking 2,354 2,573 Investment management Other ,694 5,053 Information concerning individual directors' emoluments is given on pages 56 to 62 of the Annual Report. Staff costs (including executive directors) for the year were: Company m m Wages and salaries* Social insurance Pension costs - Payments to defined contribution pension schemes Charge in respect of defined benefit pension schemes (note 19) Equity-settled transactions - - Charged to income statement Unrecognised actuarial losses on defined benefit pension schemes arising in the year Overview Business Review Corporate Governance Financial Statements * Including commission paid to sales staff 193

194 Notes to the Group Financial Statements 47. Employment costs (continued) Average number of staff (including executive directors) employed during the year: Ireland 2,324 2,504 2,324 2,504 Life assurance Banking 2,056 2,181 2,324 2, Share based payments Share option schemes The group has three share option schemes in which management and staff of the group participate. Full details of the share option schemes are set out in the directors' report on remuneration on page 58. It has been audited and forms part of the financial statements. In accordance with the IFRS transitional arrangements included in IFRS 1 and IFRS 2, IFRS 2 measurement requirements have not been applied to options granted before 7 November The total number of options outstanding as at 31 December 2009 is as follows: 2009 Number of Options Other Key Grant Date Exercise Price Employees Management Total Pre , , , ,600 98,823 1,066, and ,366,562 96,128 1,462, ,587, ,594 1,757, ,630, ,584 1,743, , , ,670 6,068, ,267 6,933, Number of Options Other Key Grant Date Exercise Price Employees Management Total Pre ,363 78, , , , , ,128, ,943 1,241, and ,483, ,840 1,650, ,775, ,250 2,014, ,830, ,434 2,003, , , ,344 7,092,829 1,278,276 8,371,

195 Notes to the Group Financial Statements 48. Share-based payments (continued) Options are normally exercisable between three and ten years from grant and expire ten years after the date of grant. Total number of options outstanding as at 31 December 2009 is equivalent to 2.5% of the issued share capital (2008: 3.0%). Should the outstanding options be exercised as at 31 December, the total amount receivable on those options would be 78m (2008: 86m). All options granted prior to 2008 have met their vesting conditions and are available to be exercised. Number of options Weighted average exercise price Outstanding as at 1 January 8,371,105 8,009, Granted during the year - 789, Exercised during the year - (28,135) Lapsed during the year (278,931) Forfeited during the year (1,159,169) (399,780) Outstanding as at 31 December 6,933,005 8,371, Exercisable as at 31 December 6,355,335 7,083,403 The 1994 scheme is closed and no further options can be issued under it. The average share price during the year was 3.14 (2008: 7.34). The share price during the year ranged from 0.63 to 5.90 (2008: 1.10 to 13.31). The weighted average contractual life of options outstanding as at 31 December 2009 is 3.5 years (2008: 4.4 years). The range of exercise prices for outstanding options as at 31 December 2009 is 9.20 to (2008: 9.20 to 14.85). The intrinsic value of options exercisable as at 31 December 2009 is nil (2008: nil) where the intrinsic value is the difference between actual share price as at 31 December (2008: 1.57) and the option price. The charge in the income statement in respect of equity-settled transactions is set out in Note 47 Employment costs. The fair value of service received for share options granted is measured by reference to the fair value of share options granted. The value is estimated based on the Black-Scholes model adjusted for dividends. There were no options issued in Fair value at grant date 1m Share price at date of grant Exercise price Expected volatility 27.70% Option life 5.4 years Expected dividend yield (at grant date) 6.80% Risk-free interest rate 3.82% In calculating the number of options which are expected to vest, the group takes into account the service condition attaching to the options. Share options are granted under a non-market performance condition which is not taken into account in calculating the fair value at date of grant. As a result of the corporate restructure to create Irish Life & Permanent Group Holdings plc, there was no subsequent impact on the number of options outstanding or on the terms and conditions of these options. Overview Business Review Corporate Governance Financial Statements 195

196 Notes to the Group Financial Statements 48. Share based payments (continued) Long-Term Incentive Plan The group has a Long-Term Incentive Plan ("the plan") which provides for the delivery of conditional fully paid ordinary shares in Irish Life & Permanent plc ("the company") to selected senior executives of the company or its subsidiaries at no cost. The plan was approved by shareholders at the AGM held in May Under the plan shares granted in 2006 vest for participants on the attainment of the following performance criteria: - Cumulative growth in earnings per share ("EPS") on an embedded value basis over the three years from grant must exceed the increase in the consumer price index (CPI) over the same period plus 5% p.a. before any shares can vest. - 25% of the share awards vest if the total shareholder return ("TSR") for the group at least matches the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices % of the share awards will vest if the TSR for the group exceeds the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices plus 8% p.a.. Awards will vest on a linear scale between 25% and 100% for TSR between the two levels specified. Conditional shares granted in 2006 lapsed in Following a review of remuneration policy, the performance conditions for plan awards granted from 2007 onwards were amended, the revised performance conditions were approved by the shareholders at the AGM held in May Under the plan, shares granted after 2007 vest for participant on the attainment of the following performance criteria: - 50% of the award vests if and only if the Return on Capital ( ROC ) target set by the Remuneration and Compensation Committee of the Board ("the Committee") at the date of grant is met (the ROC 50% ). - For awards granted in 2007, all of the ROC 50% (50% of an award) vests for cumulative ROC over the performance period of 60%. One quarter of the ROC 50% (or 12.5% of an award) vests for cumulative ROC over the performance period of 48%. For ROC performance between 48% and 60% the awards vest on a linear scale. - The Return on Capital is measured on an EEV ("European Embedded Value") basis taking the post-tax EV operating profits of the group (excluding Allianz) and dividing by the opening shareholders equity attributable to the group s insurance, banking and other activities. - 50% of an award vests if and only if the TSR already abbreviated on page for the group at least matches the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices (the TSR 50%). - All of the TSR 50% (or 50% of an award) vests if the TSR for the group exceeds the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices plus 8% p.a.. One quarter of the TSR 50% (or 12.5% of an award) vests for TSR performance equal to average TSR of the FTS Eurofirst 300 Banking and Insurance indices. Awards vest on a linear scale between 12.5% of an award and 50% of an award for TSR exceeding the average up to 8% p.a.. 196

197 Notes to the Group Financial Statements 48. Share-based payments (continued) Long-Term Incentive Plan 2009 Number of Conditional Shares Key Other Total Management Employees Outstanding as at 1 January 736, ,469 1,489,335 Lapsed during the year - (517,368) (517,368) Balance as at 31 December 736, , , Number of Conditional Shares Key Other Total Management Employees Outstanding as at 1 January 350, , ,612 Granted during the year 386, , ,858 Forfeited during the year - (32,135) (32,135) Balance as at 31 December 736, ,469 1,489,335 The fair value of service received for share grants is measured by reference to the fair value of conditional shares granted. The value is estimated using a standard Monte Carlo approach, a Cox-Ingersoll-Ross model to calculate stochastic behaviour and log normal distributions for volatility. There were no conditional shares granted in The fair value of conditional shares granted in 2008 was 6.12 per share. Share price at date of grant Expected volatility 29.60% Share grant life 3 years Expected dividend growth 10% Risk-free discount rate 3.71% Expected volatility was determined based on three-year historic volatility. As a result of the corporate restructure to create Irish Life & Permanent Group Holdings plc, there was no subsequent impact on the number of the plan shares outstanding or on the terms and conditions of these plan shares. 49. Taxation (a) Analysis of taxation charge Taxation charged to income statement m m Current taxation Charge for current year 4 11 Adjustments for prior years (1) (1) Taxation charged to income statement 3 10 Overview Business Review Corporate Governance Financial Statements 197

198 Notes to the Group Financial Statements 49. Taxation (continued) (b) Reconciliation of standard to effective tax rate m m Operating (loss) / profit (310) 63 Less share of profits of associate undertaking / joint venture 2 (22) Profit on continuing activities before tax (308) 41 Tax calculated at standard ROI corporation tax rate of 12.5% (2008: 12.5%) (39) 5 Different basis of tax for ROI life assurance 25 2 Non-taxable own share adjustment 2 (11) Local basis of taxation on overseas profits (1) 1 Non-deductible expenses 2 21 Other 14 (8) 3 10 (c) Tax effects of each component of other comprehensive income Group 2009 Gross Tax Net m m m Revaluation of property (97) 8 (89) Change in currency translation adjustment reserve 1-1 Change in available-for-sale financial assets 42 (5) 37 Amortisation of AFS securities reclassified to loans and receivables 15 (2) 13 (39) 1 (38) 2008 Gross Tax Net m m m Revaluation of property (138) 32 (106) Change in currency translation adjustment reserve (3) - (3) Change in available-for-sale financial assets (43) 5 (38) Amortisation of AFS securities reclassified to loans and receivables 9 (1) 8 (175) 36 (139) Company 2009 Gross Tax Net m m m Revaluation of property (51) 2 (49) Change in available-for-sale financial assets 42 (5) 37 Amortisation of AFS securities reclassified to loans and receivables 15 (2) 13 6 (5) 1 198

199 Notes to the Group Financial Statements 49. Taxation (continued) 2008 Gross Tax Net m m m Revaluation of property (47) 18 (29) Change in available for sale financial assets (43) 5 (38) Amortisation of AFS securities reclassified to loans and receivables 9 (1) 8 (81) 22 (59) 50. Earnings per share (a) Basic EPS Weighted average number of ordinary shares in issue and ranking for dividend excluding own shares held for the benefit of life assurance policyholders and treasury shares* 267,990, ,608,033 (Loss) / profit for the year attributable to equityholders ( 313m) 49m EPS (cent) (116.8) 18.3 (b) Fully diluted EPS Weighted average number of potential dilutive ordinary shares arising from the group's share option schemes - - Weighted average number of ordinary shares excluding own shares and treasury shares held for the benefit of policyholders used in the calculation of fully diluted EPS 267,990, ,608,033 Fully diluted EPS (cent) (116.8) 18.3 Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The group's share options are the only category of dilutive potential ordinary shares. As at 31 December 2009 and 2008 the adjustment calculation to the weighted average for the effects of dilutive potential ordinary shares was nil as the share option exercise prices were all lower than the average share price for the year. *Weighted average number of shares As at 1 January Number of shares in issue 276,782, ,017,990 Own shares held for the benefit of life assurance policyholders (8,933,798) (8,743,343) Treasury shares held (457,914) (457,914) During the year Weighted average shares issued - 558,347 Weighted average shares sold 1,929,182 1,506,245 Weighted average shares purchased (1,329,513) (1,273,292) Weighted average number of shares 267,990, ,608,033 Overview Business Review Corporate Governance Financial Statements 199

200 Notes to the Group Financial Statements 51. Dividends Cent per m Cent per m share share Dividends paid in the year Final (relating to prior period) Interim Total Dividends paid in the year Dividends proposed as at 31 December Commitments and contingencies (a) Capital commitments In the normal course of its banking business the group has entered into commitments to lend money as follows: Group Company m m m m Guarantees and irrevocable letters of credit Commitments to extend credit - less than one year one year and over Total commitments to extend credit The group has entered into commitments to purchase investment properties totalling 224m (2008: 244m). As a result of a reduction in the market value of investment properties included in the capital commitments, an onerous contract has been recognised per Note 26(b) Provisions, which resulted in a negative investment return of 33m as included in Note 43 Investment return. The group has also entered into commitments to purchase units in external property funds of 21m (2008: 25m) for the inclusion in unit-linked policyholder funds. Commitments to extend credit do not expose the group or company to significant interest rate risk. As at 30 June 2008 the group acquired the remaining 50% of Joint Mortgage Holdings No. 1 Limited (parent of Springboard Mortgages Limited) and balances as at 31 December 2008 are included in the consolidated numbers. (b) Contingencies The group like all other banks and insurance companies is subject to litigation in the normal course of its business. Based on legal advice, the group does not believe that any such litigation will have a material effect on its profit or loss and financial position. As part of the agreement in 2001 to dispose of Interstate Life Assurance Company Limited, its wholly owned US subsidiary, the group provided certain guarantees in regard to persistency experience on a block of business held by Interstate. The maximum amount payable on foot of these guarantees is 7.8m (2008: 8.4m). The group believes that the crystallisation of this amount is unlikely. Since 31 December 2008, the group has been subject to investigations by a number of statutory bodies including the Financial Regulator (Insurance Section) into deposits placed by Irish Life Assurance plc with Anglo Irish Bank (on 31 March 2008, 26 September 2008, 29 September 2008 and 30 September 2008). As at 31 December 2009, these investigations are ongoing. 200

201 Notes to the Group Financial Statements 52. Commitments and contingencies (continued) The company has given a commitment to Fastnet 4 Limited, Fastnet 5 Limited, Fastnet 6 Limited and Fastnet 7 Limited which are special purpose subsidiaries of the group, that in the event that a rating event occurs the company would provide additional reserves to each of the special purpose subsidiaries. The bonds issued by these special purpose subsidiaries are principally held by the company. A rating event is defined as the long-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below A3 by Moody s or the short-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below P-1 by Moody s or A-1 by S&P (unless the rating agencies confirm that the rating of the special purpose subsidiaries will not be adversely affected as a consequence of such rating of Irish Life & Permanent plc). As at 31 December 2009 this commitment amounted to 853m (2008: 707m). (c) Operating lease commitments The group leases various offices under non-cancellable operating leases. The future aggregate minimum lease payments under these leases are as follows: Group Company m m m m Less than 1 year Greater than 1 year and less than 5 years Greater than 5 years These leases typically run for a period of twenty five years, with an option to renew the lease after that date. Lease payments may be increased every five years to reflect market rentals. None of these leases include contingent rentals. Overview Business Review Corporate Governance Financial Statements 201

202 Notes to the Group Financial Statements 53. Principal subsidiary and associated undertakings (a) Principal subsidiary undertakings Incorporated % of ordinary Name and Registered Office in shares held Banking: permanent tsb Finance Limited* Ireland St. Stephens Green, Dublin 2 Capital Home Loans Limited* UK 100 Admiral House, Harlington Way, Fleet, Hampshire, GU13 8YA Irish Permanent Holdings (IOM) Limited* IOM /14 Ridgeway Street, Douglas, Isle of Man Joint Mortgage Holdings No. 1 Limited Ireland Lower Mount St., Dublin 2 (parent of Springboard Mortgages Limited) Life Assurance: Irish Life Assurance plc Ireland 100 Irish Life Centre, Lower Abbey Street, Dublin 1 Irish Life International Limited Ireland 100 Irish Life Centre, Lower Abbey Street, Dublin 1 Other: Irish Progressive Services International Limited* Ireland Lower Mount St., Dublin 2 Cornmarket Group Financial Services Limited Ireland 100 Liberties House, Christchurch Square, Dublin 8 Investment management: Irish Life Investment Managers Limited Ireland 100 Beresford Court, Beresford Place, Dublin 1 *held directly through Irish Life & Permanent plc. The principal country of operation of each company is the country in which it is incorporated with the exception of Irish Life International Limited which operates internationally. The registered office of Irish Life & Permanent plc is: Irish Life Centre, Lower Abbey Street, Dublin 1. (b) Principal associated undertaking Total issued equity / debt capital % holding Allianz - Irish Life Holdings plc Incorporated, registered and operating as a general 23,053,408 ordinary 1.25 shares 30.4 insurance company in Ireland (Held by a subsidiary undertaking) 202

203 Notes to the Group Financial Statements 54. Related parties The group has a related party relationship with its directors and senior management, its associate (Note 12 Interest in associated undertaking) and the group s pension schemes. As a result of the group's participation in Government guarantee schemes as described below, the group also has a related party relationship with the Government. The company also has related party relationships with its subsidiaries. (a) Directors shareholdings The interests of the directors and the company secretary, including interests of their spouses and minor children, in the share capital of Irish Life & Permanent plc are as follows: Number of beneficial ordinary shares held As at 31 December 2009 As at 31 December 2008 Ordinary Share Ordinary Share Shares Options Awards Shares Options Awards Gillian Bowler 30, , Kevin Murphy 137, ,926 74, , ,574 93,439 Breffni Byrne 10, , Danuta Gray 4, , Margaret Hayes Eamonn Heffernan 7, , Roy Keenan 5, , Ray MacSharry David McCarthy 39, ,830 47,558 39, ,651 62,956 Liam O'Reilly Pat Ryan Ciarán Long (Company Secretary) 16,629 65,925 17,967 16,629 75,440 22,382 As at 31 December 2008, Ciarán Long, as alternative director of the TSB ESOP Trustees Limited, had a non-beneficial interest in 2,016,072 shares, these shares were transferred to an approved profit scheme reducing his non-beneficial interest to zero. David McCarthy, Kevin Murphy and Ciarán Long as trustees of the employee benefit trust set up under the terms of the long-term incentive plan have a non-beneficial interest in 457,914 shares held in the plan (2008: 457,914). (b) Transactions with key management personnel Key management personnel include non-executive directors, executive directors and group senior management. Group senior management and executive directors as at 31 December 2009 includes: Kevin Murphy David McCarthy David Guinane Bill Hannan David Harney Gerry Hassett Tony Hession Gerry Keenan Brendan Healy Bruce Maxwell Group Chief Executive Group Finance Director Chief Executive permanent tsb Group Head of Risk and Compliance Chief Executive Corporate Business Chief Executive Irish Life Retail Group Head of Human Resources and Organisational Development Group Chief Executive Irish Life Investment Managers Group Chief Information Officer Chief Actuary The group's senior management as at 31 December 2008 are listed in the Annual Report and Financial Statements 2008 on page 142 and were the members of the Group Executive Team which was in place at the time. Non-executive directors are compensated by way of fees only. The compensation of executive directors and other group senior management comprises salary and other benefits together with pension benefits. In addition they participate in the group's profit sharing, share option schemes and long-term incentive schemes. Full details of individual directors compensation are set out in the Directors Report on Remuneration on pages 58 to 62 which has been audited and forms part of the financial statements. Details of the share options are set out in Note 48 Share based payments. 203 Overview Business Review Corporate Governance Financial Statements

204 Notes to the Group Financial Statements 54. Related parties (continued) Total compensation to key management personnel is as follows: Fees Salary and other benefits 4,107 4,921 Costs associated with departing executives - payment in lieu of notice 1, pension* 2,876 - Pension benefits - defined benefit 1,432 1,427 - defined contributions Equity settled benefits 83 (339) 11,129 6,987 *Actuarial value of the pension arising as the result of early resignation (based on past normal custom and practice) for departing executives. Number of key management personnel as at 31 December is as follows: Non-executive directors 9 9 Executive directors and senior management For key management who are members of a defined benefit scheme, the pension benefit included above is the increase in transfer value during the year. For defined contribution schemes it is the contributions made by the group to the scheme. In the normal course of its business the group had balances and transactions with key management personnel as follows: As at 31 December Loans* 612 1,023 Unsecured credit card balances and overdrafts 3 20 Deposits 3,564 3,479 Life assurance 6,797 5,902 Pension policies 4,594 6, Transactions during the year Loan advances Loan repayments* Interest on loans Interest on deposits (51) (69) Life assurance and pension premiums 1,441 1,217 Life assurance claims 1, *Loan balances as at 31 December 2008 include 342,180 in respect of employees who are no longer part of key management as at 31 December The loans are granted on normal commercial terms and conditions with the exception of certain house loans where executive directors and senior management may avail of subsidised loans on the same terms as other eligible management of the group. All of the loans are secured. All interest and principal due at the statement financial position date on loans has been repaid on schedule and no provision for loan impairment is required. Life policies represent values for investment contracts (including pension policies) and sum assured for protection products. In addition some policies carry serious illness insurance cover. As at 31 December 2009 total secured illness cover amounted to 4,412,352 (2008: 3,197,280).

205 Notes to the Group Financial Statements 54. Related parties (continued) Loans to directors Loans are analysed individually as follows: 2009 Balance 1 Principal Balance Interest Maximum Jan Repaid 31 Dec Paid Balance Denis Casey (228) - (5) 228 Peter Fitzpatrick 1 31 (8) 23 (1) 31 David McCarthy (9) 146 (3) (245) 169 (9) Balance 1 Principal Balance Interest Maximum Jan Repaid 31 Dec Paid Balance Denis Casey (26) 228 (9) 254 Peter Fitzpatrick 1 39 (8) 31 (1) 39 David McCarthy (8) 155 (8) (42) 414 (18) Loans to Denis Casey and Peter Fitzpatrick were secured on their principal private residence. Both of these directors resigned in The loan to David McCarthy is secured on a residential investment property. As at 31 December 2009, the total interest outstanding and the total provisions on loans by the directors / former directors was nil (2008: nil). Associate Irish Life & Permanent plc has a commission agreement with its associated company, Allianz Irish Life Holdings Limited ( Allianz ). Under this agreement, Irish Life & Permanent plc is paid commission for general insurance business written with Allianz through Irish Life & Permanent plc. Commission earned in 2009 was 8m (2008: 10m). In addition, a subsidiary of the group, Irish Life Investment Managers Limited has an investment agreement with Allianz. Fees earned under this agreement were 0.5m in 2009 (2008: 0.5m). Included within the group accounts is a net balance due to Allianz of 1.2m (2008: 2m). All transactions with Allianz are priced on an armslength basis. Other In the normal course of business the group provides investment management to the group s pension schemes. Fees earned under these agreements were 2.6m (2008: 3m). Government Irish Life & Permanent plc ( the company ) and its subsidiary Irish Permanent (IOM) Limited are participating covered institutions under the Government s Credit Institutions (Financial Support) Scheme 2008 (the scheme ) which guarantees covered liabilities raised by covered institutions up to September Covered liabilities are those liabilities in respect of retail and corporate deposits (to the extent not covered by existing deposit protection scheme in Ireland or any other jurisdiction), interbank deposits, senior unsecured debt, covered bonds and dated subordinated debt (Lower Tier 2) excluding any intra-group borrowing and any debt due to the European Central Bank arising from Eurosystem monetary operations. Under the terms of the scheme the Financial Regulator in consultation with the Minister may regulate the commercial conduct of covered institutions strictly in order to achieve the objectives of this scheme. 205 Overview Business Review Corporate Governance Financial Statements

206 Notes to the Group Financial Statements 54. Related parties (continued) The total amount of guaranteed deposits, senior unsecured debt, covered bonds and dated subordinated debt raised by Irish Life & Permanent plc ( the company ) and Irish Permanent (IOM) Limited as covered institutions of the scheme as at 31 December 2009 amounted to 21,274m (2008: 19,641m). The charge to the income statement in respect of the Government guarantee for the was 29m (3-month period ended 31 December 2008: 8m). The other institutions covered by the scheme are: 1. Allied Irish Banks plc and its subsidiaries AIB Mortgage Bank, AIB Bank (CI) Limited, AIB Group (UK) plc and Allied Irish Banks North America Inc; 2. Anglo Irish Bank Corporation Limited and its subsidiary Anglo Irish Bank Corporation (International) Limited; 3. The Governor and Company of the Bank of Ireland and its subsidiaries Bank of Ireland Mortgage Bank, ICS Building Society and Bank of Ireland (IOM) Limited; 4. EBS Building Society and its subsidiary EBS Mortgage Finance; 5. Irish Nationwide Building Society and its subsidiary Irish Nationwide (IOM) Limited; and 6. Postbank Ireland Limited. Irish Life & Permanent plc ( the company ) and its subsidiary Irish Permanent (IOM) Limited are also a participating covered institution under the Government s Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (the ELG scheme ) which guarantees certain eligible liabilities (including deposits) of up to five years in maturity. Subsequent to the year end, the group issued $1.75billion worth of bonds which are guaranteed by the ELG scheme. As a result of the group s participation in the schemes described above, the Government is recognised as a related party as defined by the accounting standards. Transactions that the group has entered into with the Government include deposits, senior debt, commercial paper and dated subordinated debt. In the normal course of business the group has various transactions with the Government, state departments and semi-state bodies including the holding of securities issued by the Government and semi-state bodies of 2,586m (2008: 379m). Deposits by banks include deposits of 450m (2008: 450m) placed by the National Treasury Management Agency (NTMA). These deposits are collateralised on notes issued by special purpose vehicles controlled by the group. The notes are secured by a first fixed charge over residential mortgages held by the special purpose vehicles, which form part of the group s consolidated financial statements. In addition to the above financial instrument transactions with the Government, the group during the normal course of business has engaged with the Government in other transactions. Included in the investment property portfolio are eleven properties for which the Office of Public Works (OPW) on behalf of Government departments is a tenant. These property investments are held in unit-linked funds, the total annual unit-linked rental income earned from these leases is 11.3m out of a total annual rental income of 150m. Some other investment properties may include tenants who are agencies financed by the Government. During 2009 the Government held a 100% shareholding in Anglo Irish Bank Corporation Limited ( Anglo Irish Bank ). Due to the group s participation in the Government s scheme outlined above, balances between Anglo Irish Bank and the group are considered related party transactions in accordance with the accounting standards. Balances as at 31 December 2008 are included for comparative purposes. As at 31 December 2009, deposits with Anglo Irish Bank amounted to 2m (2008: 79m). As at 31 December 2009, debt securities includes 701m (2008: 330m) of securities issued by Anglo Irish Bank and loans and receivables to bank includes loans amounting to 375m (2008: 262m) issued to Anglo Irish Bank. 206

207 Notes to the Group Financial Statements 54. Related parties (continued) As at 31 December 2009, deposits by banks include deposits of 1,901m (2008: 905m) from Anglo Irish Bank, including deposits in respect of a repurchase agreement with Anglo Irish Bank. As at 31 December 2009, derivative assets includes 2m (2008: 4m) being the fair value of derivative instruments where the counterparty is Anglo Irish Bank. Company In addition to the above relationships with Allianz and key management personnel, the company in the normal course of its banking business enters into transactions with the life assurance and other banking subsidiaries of the group including special purpose vehicles established in respect of securitised assets. These transactions which may be collateralised are eliminated in the consolidated group financial statements and are all priced on an arms length basis. The following amounts were included in the company statement of financial position in respect of transactions with related parties: m m Assets Loans and receivables to customers Interest bearing 8,268 8,410 Non-interest bearing Debt securities 5,041 6,198 Derivatives Other assets Liabilities Customer accounts * 6,727 5,902 Debt securities in issue 2,085 2,127 Derivatives - 1,378 Other liabilities The group s Isle of Man operations have advanced loans of 36m (2008: 46m) which in the event of the counterparty defaulting, the company has committed to reimburse the Isle of Man subsidiary for any losses incurred. As at 31 December 2009, the parent company held pools of mortgages amounting to 19,441m (2008: 19,164m) with special purpose subsidiaries of the group. These special purpose vehicles issued mortgage-backed floating-rate notes to fund the purchase of these mortgage pools. As at 31 December 2009 the parent company holds 18,279m of these notes (2008: 17,679m) to use as collateral against borrowings. Details of this collateral is included in Note 8 Loans and receivables to customers. The parent company's statement of financial position (in accordance with IAS 32) continues to show the loans and receivables that were transferred to the special purpose vehicles and which form the security for the notes issued do not qualify for derecognition. Consequently the company continues to show the loans and receivables and not the notes issued by the special purpose vehicles. The parent company's statement of financial position is shown net of the debt securities purchased from the special purpose vehicles, the related derivative contracts, customer account balances, and the funds to the special purpose vehicles which were used to acquire the mortgage pools. * Customer accounts include deposits of 1,251m (2008: 611m) to the group's life assurance operations (including deposits held for the benefit of unit linked policyholders). As at 31 December 2009 the company gave collateral nil (2008: 0.7bln) against these deposits. The collateral was in the form of the notes purchased from the special purpose vehicles as described above. Overview Business Review Corporate Governance Financial Statements 207

208 Notes to the Group Financial Statements 54. Related parties (continued) Capital Home Loans Limited (a UK subsidiary of the group) has sold pools of mortgages amounting to 5,784m (2008: 5,943m) to special purpose subsidiaries of the group. These special purpose vehicles issued sterling and euro mortgage-backed floating-rate notes to fund the purchase of these mortgage pools. In January 2009 the euro mortgage-backed floating-rate notes were redenominated into sterling. As at 31 December 2009 the parent company holds notes of 4,427m (2008: 6,155m) to use as collateral against borrowings. The company has entered into a stock-lending agreement with Irish Life Assurance plc to borrow government securities (from non-policyholder funds). In return the company places collateral in the form of mortgage-backed floating-rate notes ("notes") issued by special purpose vehicles of the group with Irish Life Assurance plc. As at 31 December 2009, the company had borrowed 0.13bln (2008: 1.1bln) of government securities against collateral of 0.2bln (2008: 1.8bln) of notes. The stock-lending agreement provides for a minimum collateral value of 150% of Aaa-rated bonds to be maintained in respect of the government securities borrowed. The stock-lending agreement ceased in January The company has given a commitment to Fastnet 4 Limited, Fastnet 5 Limited, Fastnet 6 Limited and Fastnet 7 Limited which are special purpose subsidiaries of the group, that in the event that a rating event occurs the company would provide additional reserves to each of the special purpose subsidiaries. The bonds issued by these special purpose subsidiaries are principally held by the company. A rating event is defined as the long-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below A3 by Moody s or the short-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below P-1 by Moody s or A-1 by S&P (unless the rating agencies confirm that the rating of the special purpose subsidiaries will not be adversely affected as a consequence of such rating of Irish Life & Permanent plc). As at 31 December 2009 this commitment amounted to 853m (2008: 707m). 55. Reporting currency and exchange rates The consolidated financial statements are presented in millions of euro. The following table shows, for the periods and dates indicated, the average and closing rates used by the group: Closing exchange rate / Stg Average exchange rate / Stg Closing exchange rate / US$ Average exchange rate / US$ Events after reporting period On 15 January 2010 Irish Life & Permanent plc was acquired by Irish Life & Permanent Group Holdings plc. On this date under a scheme of arrangement sanctioned by the High Court. 276,782,344* Irish Life & Permanent plc ordinary shares were cancelled and Irish Life & Permanent Group Holdings plc subsequently issued the 276,782,344 ordinary shares to the shareholders of Irish Life & Permanent plc on a one-for-one basis. On the same day, Irish Life & Permanent plc issued 276,782,344 ordinary shares to Irish Life & Permanent Group Holdings plc. Irish Life & Permanent plc is now a 100% subsidiary of Irish Life & Permanent Group Holdings plc. On 18 January 2010 Irish Life & Permanent plc was delisted from the London and Irish stock exchanges. Subsequently, Irish Life & Permanent Group Holdings plc was listed on those stock exchanges. *To meet statutory requirements, seven shares were left in issue following this cancellation. These shares are now held directly by or in trust for Irish Life & Permanent Group Holdings plc. 208

209 Additional Information Funds Under Management m m Funds managed on behalf of unit-linked policyholders 24,536 21,184 Funds managed on behalf of non-linked policyholders 2,296 2,288 26,832 23,472 Segregated funds 3,945 3,854 30,777 27,326 Overview Business Review Corporate Governance Financial Statements 209

210 210

211 Embedded Value Basis Supplementary Information Statement of Directors' Responsibilities 212 Consolidated Statement of Financial Position 213 Consolidated Income Statement 214 Consolidated Statement Of Comprehensive Income and Expense 215 Consolidated Reconciliation of Shareholders' Equity - Embedded Value Basis 215 Notes to EV Basis Supplementary Information 216 Independent Auditor's Report 231 Overview Business Review Corporate Governance Financial Statements

212 Statement of Directors Responsibilities in relation to Embedded Value Basis Supplementary Information The directors of Irish Life & Permanent plc have chosen to prepare supplementary information in accordance with the European Embedded Value ("EEV") Principles issued in May 2004 by the European Chief Financial Officers Forum. When compliance with the EEV principles is stated, those principles require the directors to prepare supplementary information in accordance with the embedded value methodology contained in the EEV principles and to disclose and explain any non-compliance with the EEV guidance included in the EEV principles. In preparing the embedded value ( EV ) basis information the directors have: Prepared the EV information in accordance with the EEV principles; Identified and described the business covered by embedded value methodology; Applied the embedded value methodology consistently to the covered business; Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently and made estimates that are reasonable and consistent; and For businesses other than those to which the embedded value methodology has been applied the results have been prepared based on the requirements of the IFRS issued by the IASB and adopted by the EU as set out in the group s accounting policies. 212 Irish Life & Permanent plc Annual Report and Financial Statements 2009

213 Consolidated Statement of Financial Position - Embedded Value Basis As at 31 December Notes m m Assets Cash and other receivables Investments 32,228 24,761 Loans and receivables to customers 8 38,592 40,075 Loans and receivables to banks 4,925 4,775 Reinsurance assets 2,126 2,258 Interest in associated undertaking / joint venture Property and equipment Shareholder value of in-force business 1,076 1,080 Intangible assets Goodwill Deferred tax assets 29 5 Other debtors and prepayments Retirement benefit asset Total assets 80,297 74,522 Liabilities Deposits by banks 18,713 18,546 Customer accounts 14,562 14,118 Debt securities in issue 13,262 10,899 Derivative liabilities Investment contract liabilities 24,060 21,110 Insurance contract liabilities 4,034 4,007 Outstanding insurance and investment claims Other liabilities and accruals Retirement benefit liability Subordinated liabilities 1,644 1,699 Total liabilities 77,812 71,746 Equity Share capital Share premium Other reserves Retained earnings 2,174 2,427 Equity excluding non-controlling interest 5,11 2,485 2,775 Non-controlling interest 6-1 Total equity including non-controlling interest 2,485 2,776 Total liabilities and equity 80,297 74,522 Overview Business Review Corporate Governance Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements

214 Consolidated Income Statement - Embedded Value Basis Notes m m Operating profit Insurance and investment business Banking (270) 30 Other (26) 5 (194) 319 Share of associate / joint venture (2) 22 Operating (loss) / profit before impairment of goodwill and tax (196) 341 Impairment of goodwill - (170) Operating (loss) / profit before tax 1 (196) 171 Short-term investment fluctuations 4 (68) (640) Effect of economic assumption changes 4 (38) 105 Adjustment on inter-operating segments 4 (17) - Loss before tax (319) (364) Taxation 3 40 (65) Loss for the year (279) (429) Attributable to: Owners of the parent (279) (433) Non-controlling interest - 4 (279) (429) Earnings per share including own shares held for the benefit of life assurance policyholders (cent) 10 (101.0) (156.8) Operating earnings before impairment of goodwill per share including own shares held for the benefit of life assurance policyholders (cent) 10 (65.9) Irish Life & Permanent plc Annual Report and Financial Statements 2009

215 Consolidated Statement of Comprehensive Income - Embedded Value Basis Notes m m Loss for the year 4 (279) (429) Other comprehensive income Revaluation of owner occupied property (57) (52) Currency translation adjustment reserve Gains / (losses) on hedged investment in foreign operations 2 (12) Gains / (losses) on unhedged investment in foreign operations 1 (3) (Losses) / gains on hedging of investment in foreign operations (2) 12 1 (3) Change in value of available for sale financial assets Change in fair value of AFS financial assets 42 4 Change in fair value of AFS financial assets prior to date of reclassification as loans and receivables - (47) 42 (43) Amortisation of AFS securities to loans and receivables 15 9 Other comprehensive income 1 (89) Deferred tax on other comprehensive income (4) 24 Other comprehensive income, net of tax (3) (65) Total comprehensive income for the year (282) (494) Attributable to: Owners of the parent (282) (497) Non-controlling interest 6-3 Total comprehensive income for the year (282) (494) Consolidated Reconciliation of Shareholders' Equity - Embedded Value Basis m m Shareholders' equity (excluding non-controlling interest) as at 1 January 2,775 3,385 Income and expenses attributable to owners of the parent (282) (497) Mark to market movement of policyholder liabilities in respect of own shares (18) 86 Adjustment to lower of cost / market value of own shares - (5) Change in own shares at cost 9 3 Dividends paid - (207) Issue of share capital - 10 Change in share-based payment reserves 1 - Shareholders' equity (excluding non-controlling interest) as at the end of the year 2,485 2,775 Overview Business Review Corporate Governance Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements

216 Notes to the EV Basis Supplementary Information 216 Basis of Preparation Earnings generated by the group s life assurance operations are prepared in accordance with the European Embedded Value ("EEV") Principles issued in May 2004 (with additional guidance on EEV disclosures issued in October 2005) by the European Chief Financial Officers ("CFO") Forum. For businesses other than life assurance the results have been prepared based on the recognition and measurement principles of IFRS issued by the International Accounting Standards Board ("IASB") and adopted by the EU which were effective as at 31 December IFRS 4 brings into force phase 1 of the IASB insurance accounting project. In view of the phased implementation of IFRS for insurance business, the group believes that shareholders will continue to place considerable reliance on embedded value information relating to the life assurance business as a whole. The statutory financial information includes insurance contracts written in the life assurance business based on embedded value earnings calculated using the EEV principles developed by the European CFO Forum. The methodology produces an Embedded Value ("EV") as a measure of the consolidated value of shareholders interests in the business covered by the EEV Principles. The EV basis financial information extends these principles to investment contracts written in the life assurance business. The statutory financial information treats tax deducted from policyholder funds as an income item while the EV basis financial information show these deductions as a tax item. The own share adjustment in EV basis partially reversed the mismatch which arises under IFRS statutory financial information where own shares held on behalf of policyholders are required to be mark to market in policyholder liabilities but the matching assets are not recorded as assets on the statement of financial position. The EV basis restates the policyholder liability relating to own shares to the lower of market value or the book cost of the shares. In the year to December 2009, the EV basis has not reversed the mismatch as market value was lower than book cost. In the EV basis the mark to market movement on the liabilities is shown as a movement in shareholder equity, in IFRS this mismatch is included in the movement on the income statement. For all business other than covered business, the EV financial information incorporates the same values and earnings included in the statutory financial information, determined using the IFRS basis except that impairment of goodwill which is shown in the IFRS income statement under operating profit is shown in non-operating profit in the EV basis. The statutory based financial information brings any change to the value of owner occupied property held in covered business through the Statement of Comprehensive Income, and allows for a depreciation charge in the Irish Life & Permanent plc Annual Report and Financial Statements 2009 income statement. The EV financial information shows any change in the value of owner occupied property for covered business in the income statement. The EV financial information reclassifies and summarises the information included in the statutory financial information. The directors acknowledge their responsibility for the preparation of the supplementary EV basis information. The methodology applied to produce the EV information for the is consistent with the methodology used to produce the EV information for the year ended 31 December 2008, other than as described in Note 12 EV assumptions relating to the equity volatility rates used in the calculation of the costs of financial options and guarantees. Covered Business The EEV Principles are applied to value covered business as defined by the Principles. This includes individual and group life assurance and investment contracts, pensions and annuity business written in Irish Life Assurance plc and Irish Life International, and the investment management business written in Irish Life Investment Managers Limited. In the EV financial information, the same valuation approach is applied to both insurance and investment contracts within the covered business. Embedded Value Embedded Value ("EV") is the present value of shareholders interests in the earnings distributable from assets allocated to the covered business after sufficient allowance is made according to the EEV Principles for the aggregate risks in the covered business. The EV consists of the following components: - free surplus allocated to the covered business; - required capital, less the cost of holding required capital; and - present value of future shareholder cash flows from in-force covered business ("PVIF"), including an appropriate deduction for the time value of financial options and guarantees. The value of future new business is excluded from the EV. The cost of holding required capital is defined as the difference between the amount of the required capital and the present value of future releases, allowing for future investment returns, of that capital. Free Surplus and Required Capital Free surplus is defined as the market value of assets in the covered business less supervisory liabilities less required capital. It is the market value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date. The free

217 Notes to the EV Basis Supplementary Information surplus is shown net of the accounting value of the subordinated debt. The free surplus also allows for the regulatory stop loss reinsurance treaty liability offset but a corresponding reduction equal to the regulatory stop loss reinsurance treaty liability offset is taken from the PVIF. The level of required capital reflects the amount of assets attributed to the covered business in excess of that required to back regulatory liabilities whose distribution to shareholders is restricted. The EEV Principles require this level to be at least the level of solvency capital at which the local supervisory authority is empowered to take action and any further amount that may be encumbered by local supervisory restrictions. In light of this the directors have set the level of required capital to be 150% of the regulatory minimum solvency margin requirement at the valuation date, including the additional margin required under the Solvency 1 rules. The directors consider this to be a conservative level of capital to manage the covered business, allowing for the supervisory basis for calculating liabilities, the insurance and operational risks inherent in the underlying products and the methods used to value financial options and guarantees included in those products. New Business New business premiums reflect income arising from the sale of new contracts during the reporting period. Increases to premiums that are generated by policyholders at their discretion are included in new business as they occur. Increases to renewal premiums on group pension contracts are treated as new business premiums. The new business contribution is the present value of future shareholder cash flows arising from the new business premiums written in the period less a deduction if relevant for the time value of financial options and guarantees. The contribution makes full allowance for the associated amount of required capital and includes the value of expected renewals on new contracts. The EEV Principles require a measure of the present value of future new business premiums ("PVNBP") to be calculated and expressed at the point of sale. The PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for calculating the new business contribution. The new business margin reported under EEV is defined as the ratio of the new business contribution to PVNBP. emerge from covered business are determined using realistic assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on conditions as at 31 December The assumed discount and inflation rates are consistent with the investment return assumptions. The assumptions for demographic elements, including mortality, morbidity, persistency and expense experiences, reflect recent operating experiences and are reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed. Further comments on the assumptions are given in Note 12 EV assumptions, below. All costs relating to the covered business are allocated to that business. The expense assumptions used for the projections therefore include the full cost of servicing the business. The costs include future depreciation charges in respect of certain property and equipment included in the free surplus. The PVIF makes no allowance for future planned development expenses where such expenses are expected to give rise to future improvements in efficiency. Certain group costs allocated to the life company are not included within the cash flow projections and are accounted for on an annual basis in the other group results. Risk Discount Rate The risk discount rate is a combination of a base risk-free rate and a risk margin, which reflects the residual risks inherent in the covered business, after taking account of prudential margins in the supervisory liabilities, the required capital and the specific allowance for financial options and guarantees. The group has adopted a bottom-up approach to the determination of the risk discount rate. Each element of risk is assessed in turn and a cost is reflected as an addition to the base risk-free discount rate. The risk discount rate derived in this way reflects the risk of volatility associated with the cash flows in the embedded value model. Overview Business Review Corporate Governance Financial Statements Projection Assumptions Projections of future shareholder cash flows expected to Irish Life & Permanent plc Annual Report and Financial Statements

218 Notes to the EV Basis Supplementary Information 218 The key assumptions are set out in Note 12 EV assumptions. The market risk margin neutralises the effect of assuming future investment returns in excess of the base risk-free rate. The non-market risk margin is based on an estimate of the impact of each of the following risks - mismatch risk, credit risk, demographic risks including mortality, morbidity, persistency and expense risks, operational risk and liquidity risk. An allowance is made for the diversification effect in that each of the risks are not expected to occur simultaneously. Financial options and guarantees are explicitly valued using a stochastic model approach and no further risk allowance is included for these in the risk discount rate. The non-market risk margin was determined by the directors following a review of the estimates emerging from the above exercise. Financial Options and Guarantees Under the EEV Principles an allowance for the time value of financial options and guarantees ( FOG ) is required where a financial option exists which is exercisable at the discretion of the policyholder. The time value of an option reflects the additional value inherent in the option due to the potential for the option to increase in value prior to its expiry date, usually due to movements in the market value of assets. The value of an option based on market conditions at the date of the valuation is referred to as the intrinsic value. The supervisory liabilities allow on a prudent basis for both the intrinsic and time value of FOGs and the PVIF allows for the run-off of these liabilities. An explicit deduction is made to the PVIF to allow for the impact of future variability of investment returns on the cost of FOGs (time value) and the current in the money cost of the FOG (intrinsic value). The cost of FOGs is calculated using stochastic models. The main financial options and guarantees and the assumptions used to value them are described in Note 13 Sensitivity analysis. Service Companies All services relating to the covered business are charged on a cost recovery basis. Tax The projections include on a discounted basis all tax that is expected to be paid under covered business under current legislation, including tax that would arise if surplus assets within the covered business were eventually to be distributed. Analysis of Profit The profit from the covered business is analysed into Irish Life & Permanent plc Annual Report and Financial Statements 2009 three main components: - New business contribution The contribution from new business written during the reporting period is calculated as at the point of sale using assumptions applicable at the start of the year. This is then rolled forward to the end of the financial period using the risk discount rate applicable at the start of the reporting year. - Profit from existing in-force business The profit from existing business is calculated using opening assumptions and comprises: - Interest at the risk discount rate on the value of in force business allowing for the timing of cash flows ( expected return ). - Experience variances: when calculating embedded values it is necessary to make assumptions regarding future experiences including persistency (how long policies will stay in force), risk (mortality and morbidity), future expenses and taxation. Actual experience may differ from these assumptions. The impact of the difference between actual and assumed experience for the reporting period is reported as experience variances. - Operating assumption changes: the assumptions on which embedded values are calculated are reviewed regularly. Where it is considered appropriate in the light of current or expected experience to change any assumptions regarding expected future experience, the impact on total value of in-force business of any such change is reported as an operating assumption change. - Expected investment return The expected investment earnings on the net assets attributable to shareholders are calculated using the future investment return assumed at the start of the year. The expected investment earnings allows for interest payable on subordinated debt and the fee payable in relation to the stop loss reassurance treaty. Two further items make up the total profit arising from the covered business: - Short-term investment fluctuations This is the impact on the EV of differences between the actual investment return and the expected investment return assumptions assumed at the start of the year. - Effect of economic assumption changes This is the impact on the EV of changes in external economic conditions including the effect changes in interest rates have on risk discount rates and future investment return assumptions.

219 Notes to the EV Basis Supplementary Information 1. Operating (loss) / profit before tax m m Insurance and investment business New business contribution Profit from existing business - Expected return Experience variances (70) - - Operating assumption changes (1) 19 Expected investment return Operating profit before tax Banking Net interest income Non-interest income Government guarantee (29) (8) Trading income (3) Administrative expenses including depreciation (287) (307) Impairment losses on loans and receivables and debt securities (376) (204) Impairment of other assets (2) - (278) 1 Investment return 8 29 Operating (loss) / profit before tax (270) 30 Other activities Non-interest income Administrative expenses including depreciation (77) (68) Impairment of other assets (4) - Operating (loss) / profit before tax (26) 5 Share of associate / joint venture (2) 22 Total operating (loss) /profit before impairment of goodwill and tax (196) 341 Banking Impairment of goodwill - (170) Total operating (loss) / profit before tax (196) 171 Overview Business Review Corporate Governance Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements

220 Notes to the EV Basis Supplementary Information 2. Life and investment new business Life business m m Present value of new business premiums (PVNBP) Single premium 1,459 1,561 Regular premium Regular premium capitalisation factor PVNBP 2,398 3,152 Annual premium equivalent (APE) New business contribution New business margin PVNBP 1.6% 2.4% APE 11.4% 15.1% ILIM Present value of new business premiums (PVNBP) 1,908 2,028 Annual premium equivalent (APE) New business contribution New business margin PVNBP 0.6% 1.1% APE 5.9% 11.4% Total new business Present value of new business premiums (PVNBP) 4,306 5,180 Annual premium equivalent (APE) New business contribution New business margin PVNBP 1.2% 1.9% APE 9.4% 14.0% 220 Irish Life & Permanent plc Annual Report and Financial Statements 2009

221 Notes to the EV Basis Supplementary Information 3. Taxation m m Life operations* Operating profit (12) (24) Short-term investment fluctuations 15 (20) Effect of economic assumption changes 11 (24) 14 (68) Banking operations Banking operating profit 24 (10) Release deferred tax Other operations 2 (1) 40 (65) * The 2009 EV life tax charge due to the increase in investment markets reflects a small reversal of the reduction in 2008 of the tax appropriation from net life unit linked policies. The 2008 EV life tax charge reflects a reduction in current and future tax policies as a result of the fall in investment markets in The movement in short- term investment fluctuations of 640m negative attracted a tax charge of 20m as a consequence. 4. Analysis of (loss) / profit after tax 2009 Gross Tax Net m m m Operating loss Insurance and investment business 102 (12) 90 Banking (270) 24 (246) Other (26) 2 (24) Share of associate (2) - (2) Operating loss (196) 14 (182) Impairment of goodwill Operating (loss) / profit (196) 14 (182) Short-term investment fluctuations (68) 15 (53) Effect of economic assumption changes (38) 11 (27) Adjustment on inter-operating segments (17) - (17) (319) 40 (279) 2008 Gross Tax Net m m m Operating profit Insurance and investment business 284 (24) 260 Banking 30 (10) 20 Other 5 (1) 4 Share of associate / joint venture Operating profit before impairment of goodwill 341 (35) 306 Impairment of goodwill (170) - (170) Operating profit 171 (35) 136 Short term investment fluctuations (640) (20) (660) Effect of economic assumption changes 105 (24) 81 Release of deferred tax (364) (65) (429) Irish Life & Permanent plc Annual Report and Financial Statements Overview Business Review Corporate Governance Financial Statements

222 Notes to the EV Basis Supplementary Information 5. Shareholders' equity m m Insurance and investment business 1,642 1,649 Banking Other activities Associate undertaking / joint venture Goodwill ,525 2,790 Non-controlling interest - (1) Adjustment on inter-operating segments (17) - Deduction in respect of own shares held for the benefit of life assurance policyholders (23) (14) Shareholders' equity 2,485 2,775 Insurance and investment net assets are analysed as follows: m m Property Equities Debt securities Deposits Other assets and liabilities Subordinated debt (212) (207) Shareholder value of in-force business 1,076 1,080 1,642 1,649 In addition to the property exposure detailed above, the group has entered into commitments to purchase investment properties totalling 224m (2008: 244m). As a result of a reduction in the market value of investment properties included in the capital commitments, an onerous contract has been recognised in other liabilities, which resulted in a negative investment return of 33m. This negative investment return is included in short-term investment fluctuations. 222 Irish Life & Permanent plc Annual Report and Financial Statements 2009

223 Notes to the EV Basis Supplementary Information 5. Shareholders' equity (continued) Analysis of movement in shareholders' equity attributable to insurance and investment business 2009 Net Worth VIF Total m m m Shareholders' equity as at 1 January 569 1,080 1,649 Operating profit after tax 120 (30) 90 Short term investment fluctuations (109) 56 (53) Effect of economic assumption changes 3 (30) (27) Capital movements (17) - (17) Shareholders' equity as at 31 December 566 1,076 1, Net Worth VIF Total m m m Shareholders' equity as at 1 January 587 1,460 2,047 Operating profit after tax 289 (29) 260 Short term investment fluctuations (253) (407) (660) Effect of economic assumption changes Capital movements (79) - (79) Shareholders' equity as at 31 December 569 1,080 1,649 The required capital at 2009 is 634m (2008: 626m). 208m (2008: 205m) of the required capital is covered by the subordinated debt and the remainder is covered by the net worth. The shareholder value of in-force is net of a deduction of 140m (2008: 118m) in respect of the cost of maintaining the required capital and net of a deduction of 46m (2008: 77m) in respect of the time value of financial option and guarantee costs. Analysis of insurance and investment operating profit after tax 2009 Net Worth VIF Total m m m New business contribution* (74) Profit from existing business Expected return* 161 (63) 98 Experience variances* 12 (70) (58) Operating assumption changes 9 (9) - Expected investment return Operating profit after tax 120 (30) 90 Analysis of insurance and investment operating profit after tax 2008 Net Worth VIF Total m m m New business contribution* (88) Profit from existing business Expected return* 242 (116) 126 Experience variances* 85 (87) (2) Operating assumption changes Expected investment return Operating profit after tax 289 (29) 260 * New business contribution includes 44m (2008: 59m) net worth effect and negative 44m (2008: negative 59m) VIF effect due to stop loss reinsurance treaty. Expected return includes negative 34m (2008: nil) net worth effect and positive 34m (2008: nil) VIF effect due to treaty. Experience variance includes positive 12m (2008: positive 66m) net worth effect due to treaty and negative 12m (2008: negative 66m) VIF effect due to treaty. Irish Life & Permanent plc Annual Report and Financial Statements Overview Business Review Corporate Governance Financial Statements

224 Notes to the EV Basis Supplementary Information 6. Non-controlling interest m m Non-controlling interest in subsidiary Opening balance as at 1 January 1 13 Total comprehensive income - 3 Acquisition of non-controlling interest (1) (15) Closing balance as at 31 December Management expenses m m Administrative expenses Depreciation Amortisation of intangible assets Analysed as follows: Banking operations Operational Restructuring / non-operational costs 13 3 Life and investment operations Operational Restructuring / non-operational costs 17 7 Other operations (includes corporate costs) Operational Restructuring / non-operational costs Administration expenses include 4m (2008: 3m) for rent paid by the bank to the life company in respect of the bank headquarters. These expenses are eliminated on consolidation in the EU IFRS result. 8. Loans and receivables to customers m m Residential mortgage loans 34,740 35,102 Commercial mortgage loans 2,386 2,403 Finance lease, instalment finance and term loans 1,749 2,381 38,875 39,886 Money market funds / repurchase agreements Deferred fees, discounts and fair value adjustments ,516 40,639 Provision for impairment of loans and receivables (477) (139) Inter-group loans and receivables (447) (425) 38,592 40, Irish Life & Permanent plc Annual Report and Financial Statements 2009

225 Notes to the EV Basis Supplementary Information 9. Funds under management m m Funds managed on behalf of unit-linked policyholders 24,536 21,184 Funds managed on behalf of non-linked policyholders 2,296 2,288 26,832 23,472 Segregated funds 3,945 3,854 30,777 27, Earnings per share As permitted under Irish Legislation, the group's life assurance subsidiary holds shares in Irish Life & Permanent plc for the benefit of policyholders. Under accounting standards these are required to be deducted from the total number of shares in issue when calculating EPS. In view of the fact that Irish Life & Permanent plc does not hold the shares for its own benefit, EPS based on a weighted average number of shares in issue is disclosed. The calculation is set out below: Weighted average ordinary shares in issue and ranking for dividend excluding treasury shares and own shares held for the benefit of life assurance policyholders 267,990, ,608,033 Weighted average ordinary shares held for the benefit of life assurance policyholders 8,334,129 8,510,390 Weighted average ordinary shares in issue and ranking for dividend including own shares held for the benefit of life assurance policyholders 276,324, ,118,423 (Loss) for the year attributable to equityholders ( 279m) ( 433m) EPS including own shares held for the benefit of life assurance policyholders (101 cent) (156.8 cent) Operating (loss) / profit before impairment of goodwill (before minority interest) after tax for the year ( 182m) 306m Operating EPS including own shares held for the benefit of life assurance policyholders (65.9 cent) cent Overview Business Review Corporate Governance Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements

226 Notes to the EV Basis Supplementary Information 11. Reconciliation of shareholders' equity on EU IFRS basis to EV basis 2009 Net Worth VIF Total m m m Statutory shareholders' equity excluding non-controlling interest as at 31 December 1, ,006 Change insurance shareholder value of in-force to post-tax basis 121 (121) - Shareholder value of in-force on investment contracts Changes in presentation of cost of FOGs 44 (44) - Deferred front end fees on investment contracts Deferred acquisition costs on investment contracts (245) - (245) Restatement of investment liabilities to regulatory basis (72) - (72) Goodwill reclassification on acquisition of non-controlling interest (5) 5 - Change in the basis of deferred tax provisioning 37 (10) 27 Impact of stop loss reinsurance treaty 147 (147) - Other 4-4 EV basis shareholders' equity excluding non-controlling interest as at 31 December 1,409 1,076 2, Net Worth VIF Total m m m Statutory shareholders' equity excluding non-controlling interest as at 31 December 1, ,347 Change insurance shareholder value of in-force to post-tax basis 99 (99) - Shareholder value of in-force on investment contracts Changes in presentation of cost of FOGs 82 (82) - Deferred front end fees on investment contracts Deferred acquisition costs on investment contracts (256) - (256) Restatement of investment liabilities to regulatory basis (74) - (74) Goodwill reclassification on acquisition of non-controlling interest (5) 5 - Change in the basis of deferred tax provisioning 36 (6) 30 Impact of stop loss reinsurance treaty 125 (125) - Other EV basis shareholders' equity excluding non-controlling interest as at 31 December 1,695 1,080 2,775 All of the above adjustments relate to the application of IFRS 4 including the tax implications. The stop loss reinsurance adjustment reflects that under EU IFRS no net worth offset is accounted for whereas under EV a regulatory offset is accounted for and is reflected in EV net worth but a corresponding opposite adjustment is reflected in EV VIF. 226 Irish Life & Permanent plc Annual Report and Financial Statements 2009

227 Notes to the EV Basis Supplementary Information 12. EV assumptions The assumed future pre-tax returns on fixed interest securities are set by reference to gross redemption yields available in the market at the end of the reporting period. The risk-free rate of return used for the risk discount rate is based on the Irish Government yield available for the effective duration of the future cash flows underlying the PVIF. The corresponding return on equities and property is equal to the risk-free rate assumption plus the appropriate risk premium. An asset mix based on the assets held at the valuation date within policyholder funds has been assumed within the projections Equity risk premium 3.0% 3.0% 3.0% Property risk premium 2.0% 2.0% 2.0% Risk free rate 4.6% 4.1% 4.4% Non market risk margin 2.1% 2.1% 2.1% Market risk margin 0.8% 0.8% 1.3% Risk discount rate 7.5% 7.0% 7.8% Investment return - Fixed interest 1.1% - 4.2% 2.7% - 4.3% 3.9% - 4.7% - Equities 7.6% 7.1% 7.4% - Property 6.6% 6.1% 6.4% Expense inflation 3.0% 3.0% 4.5% Other assumptions The assumed future mortality and morbidity assumptions are based on published tables of rates, adjusted by analyses of recent operating experience. Persistency assumptions are set by reference to recent operating experience. However, there was a deterioration in persistency experience in The deterioration is believed to be a temporary phenomenon which will improve gradually through It has therefore been disregarded in setting the long-term persistency assumption but a provision for additional adverse persistency experience in 2010 has been held. Persistency experience will continue to be monitored closely. The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business and the maintenance of business in-force. No allowance has been made for future productivity improvements in the expense assumptions. Projected tax has been determined assuming current tax legislation and rates. Deferred tax on the release of the retained surplus in the Life Business is allowed for in the PVIF calculations. EEV results are computed on a before and after tax basis. Treatment of financial options and guarantees (FOGs) The main options and guarantees for which FOG costs have been determined are: a) investment guarantees on certain unit linked funds, where the unit returns to policyholders are smoothed subject to a minimum guaranteed return (in the majority of cases the minimum guaranteed change in unit price is 0%, usually representing a minimum return of the original premium). An additional management charge is levied on policyholders investing in these funds, compared to similar unit linked funds without this investment guarantee. This extra charge is allowed for in calculating the FOG cost. b) guaranteed annuity rates on a small number of products. c) return of premium death guarantees on certain unit linked single premium products. Overview Business Review Corporate Governance Financial Statements d) guaranteed benefits for policies in the closed with-profit fund. Irish Life & Permanent plc Annual Report and Financial Statements

228 Notes to the EV Basis Supplementary Information 12. EV assumptions (continued) The main asset classes relating to products with options and guarantees are European and International equities, property and government bonds of various durations. The Deloitte s TSM Streamline model is used to derive the cost of FOGs. The model is calibrated to the Irish government yield curve and extrapolated at longer durations where no Irish government bonds exist. The equity volatility rate used in the model is calibrated to the market implied equity volatility rate at 31 December The model used as at 31 December 2008 was calibrated to the average of the historic and the market implied equity volatility rates at that time. Ten years of historical weekly data are used to derive the correlation between the returns on different asset classes. The model uses the difference between two inverse Gaussian distributions to model the returns on each asset class. This allows the model to produce fat-tailed distributions and provides a good fit to historical asset return distributions. The statistics relating to the model used are set out in the following table: As at 31 December Year Return 20-Year Return Mean 1 StDev 2 Mean 1 StDev 2 European Assets (Euro) Bonds 4.7% 3.3% 5.6% 7.3% Equities, Property 4.7% 25.7% 5.6% 28.4% UK Assets (Sterling) Bonds 4.3% 2.8% 4.8% 6.1% Equities 4.3% 23.9% 4.8% 25.9% As at 31 December Year Return 20-Year Return Mean 1 StDev 2 Mean 1 StDev 2 European Assets (Euro) Bonds 4.4% 3.9% 5.4% 8.7% Equities, Property 4.4% 26.8% 5.4% 30.3% UK Assets (Sterling) Bonds 3.6% 2.8% 4.2% 6.1% Equities 3.6% 23.8% 4.2% 25.9% 1. The risk-neutral nature of the model means that all asset classes have the same expected return. No value is added by investing in riskier assets with a higher expected rate of return. The Means quoted above reflect this. 2. Standard Deviations are calculated by accumulating a unit investment for n years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the square root. The results are comparable to implied volatilities quoted in investment markets. 228 Irish Life & Permanent plc Annual Report and Financial Statements 2009

229 Notes to the EV Basis Supplementary Information 13. Sensitivity calculations A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the continuing operations embedded value and the continuing operations new business contribution to changes in key assumptions. The details of each sensitivity are set out below: - 1% variation in discount rate-a one percentage point increase / decrease in the risk margin has been assumed in each case (meaning a 1% increase in the risk margin at end 2009 would result in a 3.9% risk margin and an 8.5% risk discount rate). - 1% variation in interest rates-a one percentage point increase / decrease in interest rates including any related changes to risk discount rates, valuation bases and non-linked assets (meaning a 1% increase in interest rates at end 2009 would increase investment returns by 1% for each year in the future and increase the risk discount rate to 8.5%). Therefore this sensitivity includes the effect on the life net worth. - 1% increase in equity / property yields-a one percentage point increase in the equity / property assumed investment returns, excluding any related changes to risk discount rates or valuation bases, has been assumed (meaning a 1% increase in equity returns would increase assumed total equity returns from 7.6% to 8.6%). - 10% decrease in equity / property values-a ten percentage point decrease in the market value of equity / property assets, including any related changes to valuation reserves and life shareholder net assets. Therefore this sensitivity includes the effect on the life net worth. - 10% decrease in maintenance expenses including any related changes to valuation expense bases and excluding any potential change to reviewable policy fees (meaning a 10% reduction on a base assumption of 10 per annum would result in a 9 per annum expense assumption). - 10% improvement in assumed persistency rates, incorporating a 10% reduction in lapse, surrender and premium cessation assumptions (meaning a 10% reduction on a base assumption of 7% would result in a 6.3% lapse assumption). - 5% decrease in both mortality and morbidity rates including any related changes to valuation bases and excluding any potential change to reviewable risk charging bases (meaning if base experienced mortality is 90% of a standard mortality table then for this sensitivity the assumption is set to 85.5% of the standard table). The sensitivities allow for any material impact on the cost of financial options and guarantees caused by the changed assumption. (a) Economic Assumptions As issued Effect of 1% Effect of 1% EV higher risk lower risk discount rate discount rate m m m Embedded value as at 31 December ,642 (113) new business contribution 51 (15) 18 Overview Business Review Corporate Governance Financial Statements Irish Life & Permanent plc Annual Report and Financial Statements

230 Notes to the EV Basis Supplementary Information 13. Sensitivity calculations (continued) (b) Market sensitivities - equity / property and fixed interest yields As issued Effect of 1% Effect of 1% Effect of 1% EV higher lower higher fixed fixed equity / interest interest property yields yields yields m m m m Embedded value as at 31 December ,642 (9) new business contribution 51 2 (3) 5 (c) Market sensitivities - equity / property values Effect of 10% decrease in equity / As issued property EV values m m Embedded value as at 31 December ,642 (100) (d) Operational assumptions As issued Effect of 10% Effect of 10% Effect of 5% EV decrease in improvement decrease in maintenance in assumed mortality and expenses persistency morbidity rates rates* m m m m Embedded value as at 31 December , new business contribution *The sensitivity results above for a 5% decrease in mortality and morbidity rates includes a 8m reduction in the embedded value as at 31 December 2009 and a nil effect on the 2009 new business contribution from the effect of a 5% reduction in the annuity mortality rate. 230 Irish Life & Permanent plc Annual Report and Financial Statements 2009

231 Independent Auditor s Report to Directors of Irish Life & Permanent plc on the Embedded Value Basis Supplementary Information We have audited the EV basis supplementary information ( the supplementary information ) of Irish Life & Permanent plc for the which comprise Consolidated Income Statement, Consolidated Statement of Financial Position, Consolidated Statement of Comprehensive Income, Consolidated Reconciliation of Shareholders Equity and the related notes. The supplementary information has been prepared in accordance with the European Embedded Value Principles issued in May 2004 by the CFO Forum ( the EEV Principles ) using the methodology and assumptions set out therein. The supplementary information should be read in conjunction with the group financial statements. This report, including the opinion, has been prepared solely for the company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and independent auditor As described in the statement of directors responsibilities, the directors responsibilities include preparing the supplementary information on the EEV basis in accordance with the EEV Principles. Our responsibility is to audit the supplementary information in accordance with International Standards on Auditing (UK and Ireland) and the terms of our engagement. Under the terms of our engagement, we report to the company our opinion as to whether the supplementary information has been properly prepared in accordance with the EEV Principles using the methodology and assumptions set out therein. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit. Basis of audit opinion We conducted our audit having regard to International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the supplementary information, and of whether the accounting policies applied in the preparation of the supplementary information are appropriate to the group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of the supplementary information. Opinion In our opinion, the EV basis supplementary information for the has been properly prepared in accordance with the EEV Principles using the methodology and assumptions set out therein. Chartered Accountants Registered Auditor 1 Harbourmaster Place IFSC Dublin 1 Overview Business Review Corporate Governance Financial Statements 23 March 2010 Irish Life & Permanent plc Annual Report and Financial Statements

232 232 Irish Life & Permanent plc Annual Report and Financial Statements 2009

233 Irish Life & Permanent Group Holdings plc Contents Company Information 234 Directors' Report 235 Statement of Directors' Responsibilities 241 Independent Auditor's Report 242 EU IFRS Financial Statements Statement of Financial Position 244 Income Statement 245 Statement of Comprehensive Income 246 Statement of Changes in Equity 247 Statement of Cash Flows 248 Notes to the Financial Statements 249 Shareholder Information 255

234 Company Information Directors: Gillian Bowler (appointed 12 October 2009) Breffni Byrne (appointed 12 October 2009) Danuta Gray (appointed 12 October 2009) Margaret Hayes (appointed 12 October 2009) Eamonn Heffernan (appointed 12 October 2009) Roy Keenan (appointed 12 October 2009) Ray MacSharry (appointed 12 October 2009) David McCarthy (appointed 30 September 2009) Kevin Murphy (appointed 30 September 2009) Liam O'Reilly (appointed 12 October 2009) Pat Ryan (appointed 15 December 2009) Bernard Collins (appointed 02 March 2010) Secretary: Ciarán Long (appointed 29 September 2009) Registered Office: Independent Auditor: Irish Life Centre, Lower Abbey Street, Dublin 1. KPMG, Chartered Accountants, 1 Harbourmaster Place, IFSC, Dublin 1. Company Registration Number: Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

235 Directors' Report The directors present their annual report and audited financial statements to the shareholders of Irish Life & Permanent Group Holdings plc ("the company") from the date of incorporation, 24 August 2009 to 31 December Principal activities / Review of the business and future developments The company was incorporated on 24 August 2009 as Aquilani plc. The company changed its name to Irish Life & Permanent Group Holdings plc on 9 October The company was established to become a group holding company. At 31 December 2009, the company had no subsidiaries. On 15 January 2010 the company acquired Irish Life & Permanent plc with Irish Life & Permanent plc becoming a 100% subsidiary of the company. This event which occurred after the reporting period is detailed in Note 8 Events after the reporting period to the financial statements. The company was listed on the Irish and London stock exchanges on 18 January Results and dividends The profit for the period amounts to 38,090 after taxation and was arrived at as shown in the income statement. The directors did not authorise any dividends payment for the period ended 31 December Risk management At 31 December 2009, the company had no holdings in subsidiaries. On 15 January 2010, the company acquired Irish Life & Permanent plc and consequently inherited the risks of Irish Life & Permanent plc. These risks are detailed in the risk management report of Irish Life & Permanent plc 2009 annual report and financial statements. The following is a summary of these risks: Irish Life & Permanent Group Holdings plc's results may be adversely affected by general economic conditions and other business conditions. Market conditions may restrict or limit the availability of funding or liquidity to subsidiaries of Irish Life & Permanent Group Holdings plc. The level of credit risk faced by Irish Life & Permanent Group Holdings plc is impacted by the economic environment. Investment market returns and changes in equity / property values may impact Irish Life & Permanent Group Holdings plc's results. Life assurance risk and other inherent risks affecting its life assurance business including persistency and market performance risks may impact Irish life & Permanent Group Holdings plc's results. Downgrades in Irish Life & Permanent Group Holdings plc's credit ratings could significantly impact its competitive position and affect its relationships with creditors or trading counterparties. Changes in interest rates may impact Irish Life & Permanent Group Holdings plc's results. Irish Life & Permanent Group Holdings plc subsidiaries conduct businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations policies and interpretations in the market in which it operates. Adverse experience in the operational risks inherent in Irish Life & Permanent Group Holdings plc's business could have a negative impact on the results of its operations. Systematic risks could adversely affect Irish Life & Permanent Group Holdings plc's business. The impact of pension fund risk. Damage to Irish Life & Permanent Group Holdings plc's public reputation or brands may adversely affect Irish Life & Permanent Group Holdings plc's relationship with new and existing customers. Litigation and regulatory investigations may not have a material financial impact but could result in reputational damage. Directors and secretary and their interests The interest of directors and secretary are set out in Note 7 Related parties to the financial statements. Directors The first directors of the company, Paul White and Cian McCourt were appointed on 24 August 2009, and were replaced by Kevin Murphy and David McCarthy on 30 September On 12 October 2009, Gillian Bowler, Breffni Byrne, Danuta Gray, Margaret Hayes, Eamonn Heffernan, Roy Keenan, Ray MacSharry and Liam O Reilly were appointed to the board. On 15 December 2009 Pat Ryan joined the board. On 2 March 2010 Bernard Collins was appointed to the board. Each of the directors will retire from the board at the company s AGM on 14 May 2010 and with the exception of Eamonn Heffernan and Liam O'Reilly, will offer themselves for reappointment. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

236 Directors' Report Share capital and shareholders Authorised share capital The authorised share capital of the company at incorporation was 128,000,000 divided into 400,000,000 ordinary shares of 0.32 each. On 29 September the shareholders approved an increase in the authorised share capital to 428,000,000 divided into 400,000,000 Ordinary Shares of 0.32 each and 300,000,000 Non-Cumulative Preference Shares of 1 each ( Euro Preference Shares ), STG 100,000,000 divided into 100,000,000 Non-Cumulative Preference Shares of STG 1 each ( Sterling Preference Shares ) and US$200,000,000 divided into 200,000,000 Non-Cumulative Preference Shares of US$1 each ( Dollar Preference Shares ). Following this approval the authorised share capital of the company was the same as that of Irish Life & Permanent plc. The company has only one class of issued shares and as at 31 December 2009, it had 119,038 ordinary shares in issue in that class. Each ordinary share carries one vote. Preference shares The general rights attaching to Sterling Preference Shares, Euro Preference Shares and Dollar Preference Shares ( Preference Shares ) shall rank pari-passu as regards the right to receive dividends and the rights on a winding up of, or other return of capital by, the company. (This is consistent with the rights which apply to the equivalent share class in Irish Life & Permanent plc.) Notwithstanding, such Preference Shares may be issued with such rights and privileges, and subject to such restrictions and limitations, as the directors shall determine in the resolution approving the issue of Preference Shares. Whenever the directors have power to determine any of the rights, privileges, limitations or restrictions attached to any of the Preference Shares, the rights, privileges, limitations or restrictions so determined need not be the same as those attached to the Preference Shares which have then been allotted or issued. Preference Shares which have then been allotted or issued shall constitute a separate class of shares. Preference Shares shall entitle the holders thereof to receive a non-cumulative preferential dividend ( Preference Dividend ) which shall be calculated at such annual rate (whether fixed or variable) and shall be payable on such dates and on such other terms and conditions as may be determined by the directors prior to allotment thereof. Provisions applying to Preference Shares The following provisions shall apply in relation to any particular Preference Shares if so determined by the directors prior to the allotment thereof: i. the Preference Shares shall rank as regards the right to receive dividends in priority to any ordinary shares in the capital of the company; ii. a Preference Dividend may only be paid from distributable profits and distributable reserves of the company; iii. a Preference Dividend may only be paid if it would not breach or cause a breach of the Central Bank of Ireland s capital adequacy requirements from time to time applicable to the company; iv. Preference Shares shall carry no further right to participate in the profits and reserves of the company other than the Preference Dividend and if on any occasion an instalment of the Preference Dividend is not paid in cash for the reasons described in sub-paragraph (b) or sub-paragraph (c) above, the preference shareholders shall have no claim in respect of such instalment; and v. each holder of Preference Shares shall, on the date for payment of Preference Dividend instalment, if such instalment had not been paid in cash, be allotted such additional nominal amount of Preference Shares of the class in question, credited as fully paid, as is equal to an amount which would have been paid to the holder had such relevant instalment been paid in cash plus an amount equal to the associated tax credit to which the holder would have been entitled had the relevant instalment been paid in cash. 236 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

237 Directors' Report Capital On a winding up of, or other return of capital (other than on a redemption of shares of any class in the capital of the company) by the company, the preference shareholders shall in respect of the Preference Shares held by them be entitled to receive, out of the surplus assets available for distribution to the company s members, an amount equal to the amount paid up or credited as paid up on the Preference Shares (including any premium paid to the company in respect thereof) together with any Preference Dividend which is due for payment after the date of commencement of the winding up or other return of capital but which is payable in respect of a period ending on or before such date and any Preference Dividend accrued prior to the date of return of capital. The amounts payable or repayable in the event of a winding up of, or other return of capital (other than on a redemption of shares of any class in the capital of the company) by the company, shall be so paid pari-passu with any amounts payable or repayable in that event upon or in respect of any further Preference Shares of the company ranking pari-passu with the Preference Shares as regards repayment of capital, and shall be so paid in priority to any repayment of capital on any other class of shares of the company. The preference shareholders shall not be entitled in respect of the Preference Shares held by them to any further or other right of participation in the assets of the company. Redemption Unless otherwise determined by the directors either generally or in relation to any particular Preference Shares prior to allotment thereof, the Preference Shares shall, subject to the provisions of the Acts, be redeemable at the option of the company where the company shall give to the holders of the Preference Shares to be redeemed not less than thirty days and not more than sixty days notice in writing of the date on which such redemption is to be effected. Voting The preference shareholders shall be entitled to receive notice of any General Meeting of the company and a copy of every circular or other like document sent out by the company to the holders of ordinary shares and to attend any General Meeting of the company but shall not, in respect of the Preference Shares, be entitled to speak or vote upon any resolution other than a resolution for winding up the company or a resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the relevant Preference Shares unless at the date of such meeting the most recent instalment of the Preference Dividend due to be paid prior to such meeting shall not have been paid in cash in which event the preference shareholders shall be entitled to speak and vote on all resolutions proposed at such meeting. At a separate General Meeting of any class of preference shareholders, on a show of hands each preference shareholder present in person shall have one vote and on a poll each preference shareholder present in person or by proxy shall have one vote in respect of each Preference Share held by him and whenever preference shareholders are entitled to vote at a General Meeting of the company then, on a show of hands, each preference shareholder present in person shall have one vote and on a poll each preference shareholder present in person or by proxy shall have such number of votes in respect of each Preference Share held by him as the directors may determine prior to the allotment of such shares. If the most recent instalment of the Preference Dividend has not been paid a majority of any class of Preference Shares in issue may requisition, and the directors shall procure, that an Extraordinary General Meeting of the company shall be convened forthwith. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

238 Directors' Report Restriction on capitalisation Save with the written consent of the holders of not less than 66 2 /3% in nominal value of each class of Preference Shares, or with the sanction of a resolution passed at a separate General Meeting of the holders of each class of Preference Shares where the holders of not less than 66 2 /3% in nominal value of the relevant class of Preference Shares have voted in favour of such resolution, the directors shall not capitalise any part of the amounts available for distribution if, after such capitalisation the aggregate of such amounts would be less than a multiple, determined by the directors prior to the allotment of each class of Preference Shares, of the aggregate amount of the annual dividends (exclusive of any associated tax credit) payable on Preference Shares then in issue ranking as regards the right to receive dividends or the rights on winding up of, or other return of capital by the company, pari-passu with or in priority to the Preference Shares, or authorise or create, or increase the amount of, any shares of any class or any security convertible into the shares of any class ranking as regards the right to receive dividends or the rights on winding up of, or other return of capital by the company, in priority to the Preference Shares. Further Preference Shares The company may from time to time create and issue further Preference Shares ranking as regards participation in the profits and assets of the company pari-passu with the Preference Shares and so that any such further Preference Shares may be denominated in any currency and may carry as regards participation in the profits and assets of the company rights identical in all respects to those attaching to the Preference Shares or rights differing therefrom. The creation or issue of, or the variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to, any shares of the company ranking after the Preference Shares as regards participation in the profits and assets of the company and, provided that, on the date of such creation or issue, the most recent instalment of the dividend due to be paid on each class of Preference Share in the capital of the company prior to such date shall have been paid in cash, the creation or issue of further Preference Shares ranking pari-passu with the Preference Shares as provided for above, shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attached to the Preference Shares. If any further Preference Shares of the company shall have been issued, then any subsequent variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to any of such further Preference Shares shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attaching to the Preference Shares, provided that the rights attaching to such further Preference Shares thereafter shall be such that the creation and issue by the company of further Preference Shares carrying those rights would have been permitted. Variation of rights Whenever the share capital is divided into different classes of shares, the rights attached to any class may be varied or abrogated with the consent in writing of the holders of three-quarters in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of the class, and may be so varied or abrogated either whilst the company is a going concern or during or in contemplation of a winding-up. Allotment of shares Subject to the provisions of the Articles of Association relating to new shares, the shares shall be at the disposal of the directors and (subject to the provisions of the Articles and the Acts) they may allot, grant options over or otherwise dispose of them to such persons on such terms and conditions and at such times as they may consider to be in the best interests of the company and its shareholders, but so that no share shall be issued at a discount and so that, in the case of shares offered to the public for subscription, the amount payable on application on each share shall not be less than one-quarter of the nominal amount of the share and the whole of any premium thereon. 238 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

239 Directors' Report Holders resident in the USA The board may at its discretion give notice to certain holders resident in the USA calling for a disposal of their shares within twenty one days or such longer period as the board considers reasonable. The board may extend the period within which any such notice is required to be complied with and may withdraw any such notice in any circumstances the board sees fit. If the board is not satisfied that a disposal has been made by the expiry of the twenty one day period (as may be extended), no transfer of any of the shares to which the notice relates may be made or registered other than a transfer made pursuant to a procured disposal of the said shares by the board, or unless such notice is withdrawn. Refusal to transfer The directors in their absolute discretion and without assigning any reason therefore may decline to register: i. any transfer of a share which is not fully paid save however, that in the case of such a share which is admitted to listing on the Stock Exchange, such restriction shall not operate so as to prevent dealings in such share of the company from taking place on an open and proper basis; ii. any transfer to or by a minor or person of unsound mind; or The directors may decline to recognise any instrument of transfer unless: iii. the instrument of transfer is accompanied by the certificate of the shares to which it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer (save where the transferor is a Stock Exchange Nominee); iv. the instrument of transfer is in respect of one class of share only; v. the instrument of transfer is in favour of not more than four transferees; and vi. it is lodged at the office or at such other place as the directors may appoint. Voting rights i. Details of substantial holders of Voting Rights: The Directors have been notified as at 23 March 2010 of the following substantial interests in voting rights held: Allianz Global Investors 3.05% (8,221,480 shares) Capital Research and Management Company 3.13% (8,435,059 shares); ii. No person holds securities carrying special rights; iii. The company has an employee share scheme that holds 1.25% (3,373,666 shares) of the total voting rights and voting rights are exercised by employee participants in proportion to their share holding within the scheme; iv. There are no particular restrictions on voting rights, except that shares held by Irish Life Assurance pursuant to section 9(1) of the Insurance Act 1990 carry no voting rights; and v. The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of its shares or on voting rights. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

240 Directors' Report Annual General Meetings At its 2010 Annual General Meeting, the members will be asked to authorise the company: To allot relevant securities within the meaning of section 20 of the Companies (Amendment) Act, 1983 up to a maximum amount equal to one third of the total amount of the Company's issued ordinary share capital as at 23 March This authority was last granted by shareholders on the 29 September 2009 for an amount equal to the aggregate of the authorised but as yet un-issued Ordinary Share capital of the company and will expire on earlier of the date of the Company's next AGM or 29 December To disapply the strict statutory pre-emption provisions in connection with a right to deal with legal or practical problems that may arise in respect of shareholders resident in certain territories and / or to deal with any fractional entitlements or any other issue of equity securities for cash up to an aggregate amount of 5% of the nominal value of the company s issued share capital. This authority will expire on the earlier of the date of the 2011 Annual General Meeting or 14 August This authority was last granted by shareholders on 29 September 2009 and will expire on the 14 May These authorities are consistent with the authorities normally granted to the directors of Irish Life & Permanent plc. Change of control of the company If any person or company obtains control of the company, the company s share option schemes contain provisions for the exercise of share options, provided these have not lapsed, even if the performance conditions have not been satisfied or, with the agreement of an acquiring company, exchange the subsisting options for new options in the acquiring company. The company s Long-term Incentive Plan contains similar provisions where awards may vest immediately to the extent determined by the directors or, with the agreement of an acquiring company, exchange the subsisting awards for new awards in the acquiring company. In the event of a change of control of the company there are no agreements (other than under normal employment contracts) between the company, its directors or employees providing for compensation for loss of office that might occur. Accounting records The directors believe that they have complied with section 202 of the Companies Act, 1990 with regard to books of account by employing financial personnel with appropriate expertise and by providing adequate resources to the financial function. The books of account of the company are maintained at the registered office of the company. Political donations There were no political donations, which require disclosure under the Electoral Act Independent auditor On 29 September 2009, KPMG, Chartered Accountants and Registered Auditor, were appointed as independent auditor to the company. In accordance with Section 160(2) of the Companies Act, 1963 the Auditor, KPMG, Chartered Accountants and Registered Auditor, will continue in office. On behalf of the board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary 23 March Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

241 Statement of Directors Responsibilities in respect of the Annual Report and the Financial Statements The directors are responsible for preparing the Annual Report and the financial statements, in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial period. Under company law the directors have elected to prepare the financial statements in accordance with IFRSs, as adopted by the European Union ( EU ) and as applied in accordance with the provisions of the Companies Acts, 1963 to In preparing the financial statements, the directors have also elected to comply with IFRSs issued by the International Accounting Standards Board ( IASB ). The financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the company. The Companies Acts, 1963 to 2009 provide in relation to such financial statements, that references in the relevant part of these Acts to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing the financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state that the financial statements comply with IFRSs as adopted by the EU as applied in accordance with the Companies Act 1963 to 2009 and IFRSs issued by the IASB; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. Under applicable law the directors are also responsible for preparing a Directors Report. The directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that its financial statements comply with the Companies Acts, 1963 to The directors are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company s website Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. On behalf of the board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary 23 March 2010 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

242 Independent Auditor s Report to the Members of Irish Life & Permanent Group Holdings plc We have audited the financial statements (the financial statements ) of Irish Life & Permanent Group Holdings plc for the period ended 31 December 2009 which comprise the Statement of Financial Position, the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Equity, the Statement of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein. This report is made solely for the company s members, as a body, in accordance with section 193 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Independent Auditor The directors responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards ( IFRSs ) as adopted by the European Union are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view in accordance with IFRSs as adopted by the European Union and have been properly prepared in accordance with the Companies Acts 1963 to We also report to you whether, in our opinion: proper books of account have been kept by the company; at the reporting date, there exists a financial situation requiring the convening of an extraordinary general meeting of the company; and the information given in the Directors Report is consistent with the financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit, and whether the financial statements are in agreement with the books of account. We also report to you if, in our opinion, any information specified by law regarding directors remuneration and directors transactions is not disclosed and, where practicable, include such information in our report. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Directors Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. 242 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

243 Independent Auditor s Report to the Members of Irish Life & Permanent Group Holdings plc Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the company s affairs as at 31 December 2009 and of its profit for the period then ended; and the financial statements have been properly prepared in accordance with the Companies Acts 1963 to We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the company. The financial statements are in agreement with the books of account. In our opinion the information given in the Directors Report is consistent with the financial statements. The net assets of the company, as stated in the company Statement of Financial Position are more than half of the amount of its called up share capital and, in our opinion, on that basis there did not exist at 31 December 2009 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company. Chartered Accountants Registered Auditor 1 Harbourmaster Place IFSC Dublin 1 23 March 2010 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

244 Statement of Financial Position as at 31 December Notes '000 Assets Cash and cash equivalents 2 38 Other assets 3 51 Total assets 89 Liabilities Current tax 13 Total liabilities 13 Equity Share capital 4 38 Share premium - Retained earnings 38 Total equity 76 Total liabilities and equity 89 On behalf of the board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary 244 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

245 Income Statement from date of incorporation 24 August 2009 to 31 December 2009 Notes From 24 Aug 2009 to 31 Dec 2009 '000 Other income 5 51 Total operating income 51 Operating profit 51 Profit before taxation 51 Taxation 6 (13) Profit for the period 38 On behalf of the board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

246 Statement of Comprehensive Income from date of incorporation 24 August 2009 to 31 December 2009 Notes From 24 Aug 2009 to 31 Dec 2009 '000 Profit for the period 38 Other comprehensive income - Deferred tax on other comprehensive income - Other comprehensive income, net of tax - Total comprehensive income for the period 38 On behalf of the board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary 246 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

247 Statement of Changes in Equity from date of incorporation 24 August 2009 to 31 December 2009 Attributable to owners of the parent Share capital Retained earnings Total* '000 '000 '000 As at 24 August Profit for the period Other comprehensive income (net of tax) Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Ordinary shares issued As at 31 December *Total equity including controlling and non-controlling interests. On behalf of the board Gillian Bowler Chairman David McCarthy Group Finance Director Kevin Murphy Group Chief Executive Ciarán Long Company Secretary Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

248 Statement of Cash Flows from date of incorporation 24 August 2009 to 31 December 2009 Notes From 24 Aug 2009 to 31 Dec 2009 '000 Profit before taxation for the period 51 Increase in operating assets Other assets (51) Net cash flows from operating activities before tax - Tax paid - Net cash flows from operating activities - Cash flows from investing activities - Net cash flows from investing activities - Cash flows from financing activities Issue of ordinary share capital 4 38 Net cash flows from financing activities 38 Increase in cash and cash equivalents 38 Analysis of changes in cash and cash equivalents Cash and cash equivalents as at 24 August Net cash flow 38 Cash and cash equivalents as at 31 December Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

249 Notes to the Financial Statements period ended 31 December Basis of preparation and significant accounting policies Introduction Irish Life & Permanent Group Holdings plc ("the company") is a company domiciled in Ireland. The company s registered office address is Irish Life Centre, Lower Abbey Street, Dublin 1, Ireland. The company was established to become a group holding company. The company was incorporated as Aquilani plc on 24 August On 9 October 2009, the company changed its name to Irish Life & Permanent Group Holdings plc. The company did not trade during the period from incorporation to 13 November The financial statements of the company were authorised for issue by the directors on 23 March As at 31 December 2009, the company had not been involved in any significant transactions hence no detailed accounting policies were applicable to the company at that date. The accounting policies applied in the preparation of the financial statements for the period ended 31 December 2009 are set out below. Basis of preparation The financial statements have been prepared in accordance with International Financial Accounting Standards ( IFRSs ) as issued by the International Accounting Standards Board ("IASB") as adopted by the EU and in accordance with the provisions of the Companies Acts 1963 to The financial information has been prepared on a going concern basis. After making appropriate enquiries, the directors consider that the company has adequate resources to continue in operation for the foreseeable future. For this reason they adopt the going concern basis in preparing the financial statements. The IFRSs adopted by the EU applied by the company in the preparation of these financial statements are those that were effective for accounting periods ending on or before 31 December The following standards and interpretations to existing standards have been published by the IASB and to the extent indicated have been adopted by the EU and will be mandatory for future accounting periods. The company has not early adopted these standards or interpretations. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

250 Notes to the Financial Statements period ended 31 December Basis of preparation and significant accounting policies (continued) Standards and interpretations effective for annual periods beginning on or after 1 January 2010 Title Impact on company financial statements IFRS 2: Share-Based Payment (Amendment) The amendments incorporate 'IFRIC 8: Scope of IFRS 2' and 'IFRIC 11: IFRS-Group and treasury share transactions' and expand on the guidance included in IFRIC 11 to address the classification of group arrangements which were not previously covered by that interpretation. This amendment is not expected to have a material impact on the financial statements of the company. IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations (Amendment) This amendment clarifies that IFRS 5 specifies the disclosure requirements in respect of non-current assets classified as held for sale and discontinued operations. This amendment is not expected to have a material impact on the financial statements of the company. IAS 1: Presentation of Financial Statements (Revised) This amendment clarifies that the potential settlement of a liability by the issue of equity will not affect its classification as current or non-current. This allows a liability to be classified as non-current (provided the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months following the accounting period). This amendment is not expected to have a material impact on the financial statements of the company. IAS 7: Statement of Cash Flows (Amendment) The amendments to IAS 7 specify that only expenditures that result in a recognised asset in the statement of financial position can be classified as investing activities in the statement of cash flows. This amendment is not expected to have a material impact on the financial statements of the company. IAS 17: Leases (Amendment) This amendment deletes specific guidance on the classification of leases of land to make it consistent with general guidance on leases. In accordance with the general principles of IAS 17, leases should be classified as operating or finance leases. This amendment is not expected to have a material impact on the financial statements of the company. IAS 36: Impairment of Assets (Amendment) This amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for impairment testing purposes is an operating segment as defined by IFRS 8: Operating segments (paragraph 5) before the aggregation of operating segments with similar economic characteristics allowed by paragraph 12 of IFRS 8. This amendment is not expected to have a material impact on the financial statements of the company. 250 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

251 Notes to the Financial Statements period ended 31 December Basis of preparation and significant accounting policies (continued) Basis of measurement The company financial statements are presented in thousands of euro. They have been prepared on the historical cost basis. Estimates and assumptions The preparation of financial information in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on management s best judgement as to what is reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Cash and cash equivalents Cash and cash equivalents include cash and highly liquid financial assets with initial maturities of three months or less, which are subject to insignificant risk of changes in their fair value, and are used by the company in the management of their short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. Taxation Taxation comprises both current and deferred tax. Taxation is recognised in the income statement except where it relates to an item which is recognised directly in equity. Corporation tax payable is provided on taxable profits at current tax rates. Deferred tax is provided using the liability method on all temporary differences except those arising on goodwill not deductible for tax purposes, or where the temporary difference that arose on the initial recognition of an asset or liability in a transaction that affects neither accounting profit nor taxable profit. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax liabilities and assets are offset only where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of taxation from the proceeds. 2. Cash and cash equivalents 2009 '000 Cash and cash equivalents 38 During the period, the company received cash to the value of 38,092 in respect of ordinary shares issued. 3. Other assets 2009 '000 Amounts due from other companies 51 As at 31 December 2009, the company recognised this contribution as a creditor balance with Irish Life Limited. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

252 Notes to the Financial Statements period ended 31 December Authorised and issued share capital Authorised share capital as at 31 December Number of Shares 2009 Share Capital '000 Ordinary shares of 32 cent each 400,000, ,000 non-cumulative preference shares 300,000, ,000 US$ non-cumulative preference shares 200,000, ,832 Stg non-cumulative preference shares 100,000, ,600 The company has only one class of issued shares and as at 31 December 2009, it had 119,038 ordinary shares in issue in that class. Each ordinary share carries one vote. The number of ordinary 32 cent fully paid up shares is as follows: 2009 As at 24 August - Issued during the period 119,038 As at 31 December 119,038 On the date of incorporation 24 August 2009, the authorised share capital of the company was 400,000,000 ordinary shares of 0.32 each. On this date the issued share capital of the company was seven fully paid up ordinary shares at 0.32 each, total amount of 2. On 9 October 2009, 119,031 ordinary shares of 0.32 each were issued at par for total cash proceeds of 38,090 to facilitate commencement of trading. 5. Other income 2009 '000 Other Income 51 On 9 October 2009, Irish Life Limited, a subsidiary of Irish Life & Permanent plc, made an unconditional contribution to the company of 50,787. Neither Irish Life Limited nor any other subsidiaries of Irish Life & Permanent plc have the right to seek repayment in any circumstances and the contribution is not made in return for any rights such as voting rights, any share of the profits or any share of the surplus assets of the company on liquidation. 252 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

253 Notes to the Financial Statements period ended 31 December Taxation (a) Analysis of taxation charge Taxation charged to income statement 2009 '000 Current taxation Charge for current period (13) Taxation charged to income statement (13) (b) Reconciliation of standard to effective tax rate 2009 '000 Operating profit 51 Profit on continuing activities before tax 51 Tax calculated at standard ROI corporation tax rate of 25% (13) 7. Related parties The company has a related party relationship with its directors. Directors' shareholdings At 31 December 2009, none of the directors nor their spouses and minor children held any interest in the share capital of Irish Life & Permanent Group Holdings plc. At 31 December 2009, the company secretary, Ciarán Long, held one ordinary share in the share capital of Irish Life & Permanent Group Holdings plc. For the period ended 31 December 2009, no compensation / fees was remitted to directors in respect of their duties regarding the company. In the normal course of its business the company had no transactions or outstanding balances as at 31 December 2009 with any of its directors. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

254 Notes to the Financial Statements period ended 31 December Events after the reporting period On 15 January 2010 Irish Life & Permanent Group Holdings plc ("the company") acquired Irish Life & Permanent plc. On this date 276,782,344* Irish Life & Permanent plc ordinary shares were cancelled and the company subsequently issued the 276,782,344 ordinary shares at the nominal value of 0.32 to the shareholders of Irish Life & Permanent plc on a one-for-one basis. On the same day, Irish Life & Permanent plc issued 276,782,344 ordinary shares to the company. Irish Life & Permanent plc is now a 100% subsidiary of the company. On 18 January 2010 Irish Life & Permanent plc was delisted from the Irish and London stock exchanges. Subsequently, Irish Life & Permanent Group Holdings plc was listed on these stock exchanges. *To meet statutory requirements, seven shares were left in issue following this cancellation. These shares are now held directly by or in trust for Irish Life & Permanent Group Holdings plc. The following table outlines the impact of the above events on the equity of the company: Share Capital premium Other Distributable redemption Share capital account reserves earnings reserve Total '000 '000 '000 '000 '000 '000 Balance as at 31 December Cancellation of shares 1 (38) - - (38) 38 (38) Investment in IL&P plc 2 88, ,631 2,497, ,584,366 Recognition of distributable reserves 3 - (634,102) - 634, Impairment of investment in IL&P plc (2,497,165) - - (2,497,165) Balance as at 15 January , , , ,087,239 1 This is in respect of the purchase and subsequent cancellation of 119,031 ordinary shares. 2 The recognition of the issue of shares in return for the investment in Irish Life & Permanent plc on 15 January The investment of 3,584,366,000 represents the book value of Irish Life & Permanent plc reserves as at 31 December For the company to have the ability to make distributions to the company's new shareholders who were previously shareholders of Irish Life & Permanent plc, the high court approved an application to create a distributable reserve (SPA reduction reserve) through a reduction in the share premium account. 4 Following the initial recognition of the company's investment in Irish Life & Permanent plc, an impairment will occur to recognise the investment at its recoverable amount, the market value for Irish Life & Permanent plc on 15 January Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009

255 Shareholder Information Annual reports for Irish Life & Permanent plc and Irish Life & Permanent Group Holdings plc are available to view online at This website also provides further information to shareholders including contact details and links to our other group websites. Analysis of holdings of ordinary shares at 23 March 2010 Shareholders Shares Number Percent Number Percent Size of shareholding 1-1, , % 41,397, % 1,001-5,000 8, % 16,744, % 5,001-10, % 6,467, % 10,001-50, % 9,647, % 50, , % 5,075, % 100,001-1,000, % 47,976, % Over 1,000, % 149,473, % 135, % 276,782, % Shareholder Enquiries A full range of online services is available to the shareholders of Irish Life & Permanent Group Holdings plc. These services are provided by Capita Registrars who administer the company s share register. To use these, services please log onto our group website and click on Shareholder Services / My Shareholding. Shareholder Helpline If you have any difficulty accessing your shareholding online, or have any queries regarding your shareholding in general, you should contact the Capita Helpline at: Telephone: +353 (0) Fax: +353 (0) [email protected] Registered Office Irish Life & Permanent Group Holdings plc, Irish Life Centre, Lower Abbey Street, Dublin 1. Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements

256 Notes 256 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009